Bank expects forex will tighten

FOREIGN exchange (FX) liquidity in the country is expected to tighten, and volumes fall, after stronger foreign exchange inflows last December, according to Bank South Pacific.
Group general manager treasury Rohan George highlighted in the BSP Economic and Market Insight December quarter publication that: “FX inflows are expected to taper from the larger volumes seen in December 2019, into the seasonally subdued first Quarter of 2020.”
George said reduced FX inflows and growing New Year import flows as importers restock, would see FX liquidity tighten and a consequent increase in outstanding orders in the PNG FX market.
“Bank of Papua New Guinea will continue to intervene, supplying foreign currency to the market on a monthly basis, to assist in managing the mismatch between FX inflows and outflows,” he said.
“FX inflows are forecast to pick up at the end of the March quarter, reducing outstanding orders, aiding importers, with many of these importers, relying on BSP to fulfil their foreign exchange needs.”
George said the bank also expected the current slow, gradual, downward bias of the kina against the US dollar to persist this year.
The improvement in foreign currency inflows in March 2020 is likely to be supported by the palm oil price, which has improved by 50 per cent in the past nine months, and increased activity in the mining and agricultural sectors.
Palm oil prices are expected to find support in 2020 with higher biofuel mandates in Indonesia and Malaysia seeing an end to a four-year low in July 2019.
In January 2020, Indonesia rolled out a B30 biodiesel mandate, requiring diesel to contain 30 per cent palm-based biofuel, up from 20 per cent.
Malaysia’s biofuel mandate was also increased to 20 per cent, from 10 per cent previously.
The implementation of the B30 mandate in Indonesia and the B20 mandate in Malaysia will translate to a 25 per cent and 15 per cent increase in biofuel demand according to analysts.
Dry weather in 2020 will limit production volumes, whilst strong competition from soybean and sunflower oil substitutes and weaker oil prices will cap prices.
The kina is likely to outperform against the Australian dollar (as was the case in 2019), with Australian exports of iron ore, coal, agriculture, tourism and education disrupted by the bushfires and the coronavirus and US interest rate differentials weighing on the Australian dollar.
Gold continues to benefit from persistent global uncertainty in 2020, whilst analysts are predicting oil and copper prices will fall slightly, both suffering from weakening global growth and oversupply.
Oil prices fell to its lowest level in a year, as the coronavirus outbreak curtailed Chinese demand and sparked potential supply cuts by OPEC and its allies.
As the outbreak hits fuel demand in China, the world’s biggest crude oil importer, refiner Sinopec Corp told its facilities to cut throughput this month.