Sri Lanka rupee in volatile ride

May 02, 2012 (LBO) – Sri Lanka’s rupee went on a wild ride Wednesday in thin trade in a market where there is little depth and uncertainty is high among dealers, market participants said. The rupee eventually closed around 127.70/128.50

The rupee traded as low as 131.00 to the US dollar and strengthened as much as 126 rupees against the US dollar in the spot market.

Sri Lanka’s forex markets are now shallow after the Central Bank cut net open positions of banks, a usual practice that has increased volatility in previous balance of payments crises as well.

Dealers say some banks started to sell dollars as the implied interest yield on swaps rose as much 11.70 percent for a month. There were also more remittances awaiting conversion after holiday.

However there were no buying from importers who earlier covered at higher prices and were expecting the rupee to fall further following Treasury secretary P B Jayasundera’s statements that the rupee would eventually settle around 125 to the US dollar.

The rupee rose in small deals and then fell from 125.50/126.25 levels towards 127.50 in just two deals, reflecting unusual volatility, dealers said.