Friday, June 11, 2010

Currencies: Tarred With The Same Brush

In Bloomberg today (excerpts):

Currency Controls Mount in Asia as Euro Hurts Exports

June 11 (Bloomberg) -- The world’s biggest expected swings in foreign-exchange markets and the euro’s record depreciation are prompting Asian exporters to seek currency controls.

TLtek Co., a South Korean exporter of auto-part making machines, called on policy makers to limit volatility caused by “gambling” on the won. Kuala Lumpur-based Sime Darby Bhd., the world’s biggest publicly traded palm-oil producer, needs to revise its business plan to account for the euro’s 19 percent drop against the ringgit. Taipei-based Maestro Innovations Corp., which makes infrared lamps for muscle pain, said curbs on the Taiwan dollar and China’s yuan would support orders.

Policy makers in South Korea, Taiwan and China are responding to Europe’s debt crisis by selling their own currencies, limiting investment inflows and delaying interest- rate increases. Goldman Sachs Group Inc. slashed its three-month Indian rupee forecast by 7 percent yesterday, Westpac Banking Corp. cut its year-end estimate for the won by 8 percent and ING Groep NV said the yuan won’t be revalued for a year.

“With the euro plunging, some central banks seem to be quite aggressive in stemming gains in their currencies,” said Kenichiro Ikezawa, who oversees about $3 billion as a fund manager at Daiwa SB Investments Ltd. in Tokyo and favors Brazilian and Australian debt over emerging-market Asian bonds. “China may delay revaluation and that, together with low yields in Asia, give little incentive to buy them.”

The South Korean won’s one-month implied volatility, a measure of exchange-rate swings used to price options, climbed 162 percent this quarter, the second-biggest jump among 47 currencies tracked by Bloomberg. Nine of the 10 biggest increases are in Asia. The won has the widest expected fluctuations at 24 percent, compared with 13 percent for the Indonesian rupiah and 12 percent for the Malaysian ringgit.

Exporters are seeking help from policy makers because the 10 most-active currencies in Asia outside Japan have strengthened an average of 19 percent against the euro this year. Shipments to the European Union fell in April from a month earlier, ranging from 5.6 percent for Malaysia to 19.5 percent for Thailand, according to government statistics. Europe took in 27 percent of India’s exports and 23 percent of China’s.

Sime Darby will have to revise its plans after the ringgit rose beyond 4 per euro for the first time since 2003, 13 percent stronger than its estimate, Chief Financial Officer Tong Poh Keow said in an interview on May 14 in Kuala Lumpur.

“We are doing our management plan and we will adjust based on our full-year expectations,” she said. “The decline in the euro will affect us.”…

…The Bank of Korea intervened at least twice in late May to stop the won gaining beyond 1,200 per dollar, a level 8 percent weaker than its 19-month high of 1,102 on April 26, according to traders who asked not to be identified as policy makers don’t discuss specifics of intervention. South Korea will introduce measures to reduce volatility in capital flows “soon,” Vice Finance Minister Yim Jong Yong said in a June 9 interview. The central bank will “act energetically” in the market to curb volatility, Governor Kim Choong Soo said today.

The Central Bank of the Republic of China (Taiwan) has stepped into the market to buy dollars almost every day in the past month, helping weaken the island’s currency by 1.6 percent to NT$32.35, said traders familiar with its operations, who also declined to be identified. In January, policy makers set a one- week deadline for money brought into the country to be invested or repatriated and in April ordered a review of loans to expose speculators. Governor Perng Fai-nan told reporters on June 4 the exchange rate will be “determined by market supply and demand.” …

…“Traders report Korea and Taiwan’s central banks have been in the market almost daily,” said Sean Callow, a strategist at Westpac in Sydney. “Ranges have been so wide over the past month and all the lines in the sand have been washed away.” …

…Bangkok-based Thai Union Frozen Pcl, the world’s second- largest tuna canner, wants the Bank of Thailand to restrain the baht to give it time to shift sales to “better markets,” President Thiraphong Chansiri said in a May 12 interview…

…Policy makers may seek to safeguard Asia’s growth potential by delaying rate increases, Tadashi Tsukaguchi, a fund manager in Tokyo at Sparx Group Co., the region’s biggest hedge fund with $7.3 billion in assets, said yesterday.

“A slowdown in Europe means countries like China, Korea and Southeast Asia have close to zero chance of raising rates,” said Tsukaguchi, who has taken short positions against some Asian currencies that profit from declines.

There’s no doubt that the fall in the Euro stemming from the zone’s ongoing fiscal problems will hurt local exporters. But the flip side to that is that a depreciation in the currency is one of the few mechanisms the Eurozone has to fend off complete economic collapse in the PIGS, which is in no one’s interest.

The action of China, Korea and Taiwan (there’s no mention of any of the other central banks among the countries affected) is tantamount to competitive devaluation, which really helps no one either.

Is BNM intervening in the market to depress the MYR? Not hardly – international reserves was virtually unchanged between April and May 2010, which means if there was intervention it was two-way. But current events do reinforce my belief that July’s Monetary Policy Meeting will see a pause in “normalisation” of the Official Policy Rate.

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