The auction system is working well as the process of price discovery becomes more exact, with just $12 between the top bid and the lowest successful bid in the last auction, and with the weighted average a little over $2 more than the lowest successful bid, which means the general range of most successful bids was a lot tighter, perhaps $70 to $76.
The fact that the top bid has been easing from $100 to $82,17 over the five auctions in the past four weeks suggests that bidders are becoming more precise in their calculations and less liable to assume that the black market knows better.
Even the black market, though, has been reacting to the auctions, with prices falling, partly as a result of reduced demand as most big-timers move off the streets and into the RBZ tower.
Government has invested a lot of effort to stop large anonymous transactions.
The inflation outlook has also improved.
But smaller transactions are still happening in the black market.
Since a street dealer can move $20 000 of EcoCash a day, this is not going to go away anytime soon.
But a 20 percent drop in what the street dealers will pay is, by any standards, significant despite efforts by those who dominate that market to keep rates as high as possible.
Prices in retail markets are stabilising, with more tracking of the auction rate rather than the street rate.
Pricing is now increasingly being based on actual costs rather than expected costs.
Thanks to the tendency by business to price to black market rates, the Reserve Bank of Zimbabwe has escaped the blame for the rapid price increases and inflation before the inaugural foreign currency auctions.
This has significantly reduced pressure on the markets.
An extra boost came with the injection of US$3,5 million — around a quarter of the total on offer — from sellers in the last auction.
So the RBZ market is now starting to attract sellers, and the stability it has been building is showing that you might as well sell this week rather than wait another fortnight.
The RBZ has been putting enough of its own money into the auctions to get the basic trading working, but not enough to create unattractive prices for sellers.
Governor Dr John Mangudya recently indicated that there is US$1 billion in the private foreign currency nostro accounts and around $40 billion in ordinary deposits.
There is also cash money, in both currencies, that has been squirrelled away, but considering the central bank’s reluctance to print more money, including the habit of most people — as current robberies are showing — to keep stacks of US$100 bills hidden, it is impossible that the Zimbabwe dollar banknotes hoarded out of the banking system could be anything close to that 40:1 ratio with the hidden US notes.
This little bit of information shows that there is a lower limit to the auction rate, $40, but that would mean that all the US dollars stashed in nostro accounts were to be simultaneously sold.
Of course, a good block of them are not for sale.
There are already committed by their holders to buy equipment, spares, inputs and services or even to pay dividends to foreign shareholders.
But that same ratio also starts setting an upper limit to the auction rate.
Clearly, the available stock of Zimbabwe dollars is not enough to buy whatever is put on sale.
The Mid-Term Budget Review by Finance and Economic Development Minister Prof Mthuli Ncube also shows that Treasury managed the remarkable feat of keeping within budget during the first half of the year.
Prof Ncube is quite confident, despite all the pressures brought by Covid-19 and inflation, of doing the same in the second half.
Most importantly, it looks like we will grow at least six or seven months’ supply of wheat.
Various logistical problems made it impossible to plant the targeted 80 000ha.
But the 42 000ha under production is relatively better than in recent years.
This is likely to reduce demand for foreign currency.
Anything approaching reasonable rains during the 2020/2021 summer cropping season would result in maize self-sufficiency, provided preparations are done on time.
This again relieves pressure on the fiscus.
On the supply side for the foreign currency market, the tobacco crop was better than expected and average prices are rising, thanks to more experienced farmers.
Global oil prices have also declined.
Long-term trends are difficult to predict, especially when quite a lot depends on the production of a safe and effective vaccine against Covid-19.
Volatile rainfall patterns in Southern Africa, vaccine research, the anti-smoking lobby, fuel demand during the current lockdown and world prices for gold and platinum have to be considered.
But recognising that there are lower limits to the exchange rate, based simply on the money supply figures for US dollars in Zimbabwe and the number of local dollars in existence, and upper limits, based on how long exporters can keep their spare money in nostro accounts, is a start.
Some of those low bids that do not make the cut are possibly not being made by businesses taking a chance, but rather by businesses wondering how money supply pressures will pan out, and wondering if there is a modest bubble in the making.
So far, they have been proved wrong, but keeping options open is difficult if only one bid per bidder is possible.
The interesting part of the auction system is that it is a market, and that means supply and demand play a pivotal role.
The RBZ has little room to manoeuvre: turning taps open a bit or down a bit, but not much in the medium term, let alone the long term.
And even in the very short term it cannot make or break a market.
So the process of price discovery will continue, but there are no guarantees that prices for foreign currency will continue to rise endlessly, especially considering the level of money supply.
So the stability that is currently in place is likely to remain the new stability, but nothing is guaranteed. — Business Weekly .