Monday, October 11, 2010

Say What?

There was this article over the weekend on the Ringgit, for which I have very little comment, except for one stupefying line and one irrelevant one (emphasis added):

A stronger ringgit review

OVER the past few months, one topic has been in the limelight and it shows no sign of tapering off. Over the week, the ringgit hovers at 3.05-3.08 against the greenback or US dollar, and about 4.80 against the British pound...

...So why has the ringgit been appreciating? There are many arguments brought about from different schools of thoughts, but few are worth mentioning here. First, is the fact that the United States has recently undergone a recession (or still is?) and therefore, in order for it to recover, the greenback is taking a “back-seat”.

Another explanation will be the balance of payments methodology, whereby foreign exchange rate must be at its equilibrium level, which is the rate that produces a stable current account balance.

Malaysia, having a trade surplus, will experience an increase in its foreign exchange reserves, which ultimately appreciate the value of the ringgit.

What this effectively says is that, at an accelerating export, our currency will reach a level whereby the goods become expensive, and in a competitive environment, buyers will find replacements, which in return will reduce exports and maintain equilibrium.

Likewise, with a stronger currency, foreign goods become cheaper and thus accelerating imports.

The third reason can simply be the improving economic growth. While the Western world was undergoing a recession, Asian countries were affected primarily from the foreign trade transactions with the affected countries.

Otherwise, stellar performances followed. This, in return, will strengthen the exchange rates of the currencies.

Raymond Roy Tiruchelvam, a financial planner with the Sabic group of companies, wonders if there is enough gold to redeem all the currencies in the world.

Having a trade surplus has nothing to do with increasing foreign exchange reserves, nor is the opposite necessarily true either. You will only get increasing foreign reserves if the central bank intervenes in the foreign exchange market to sell down its own currency i.e. deliberate undervaluation relative to the market determined rate.

Which means in fact that the causality runs the other way – increasing international reserves are symptomatic of an appreciating currency. But if there is no intervention, the currency can appreciate or depreciate with no impact on international reserves. Most central banks with free floating currencies hold very little foreign exchange reserves at all.

The situation in Malaysia is similar – throughout the Ringgit’s latest appreciation phase, international reserves have barely budged and has in fact largely trended down, mainly from the BNM’s revaluing their reserves as the Ringgit appreciates:

01_myrusd

02_reserves

BNM has admitted intervening in the market, mostly in 2008  – first in early to mid-2008 to contain appreciation of the Ringgit via higher trade receipts from the 2008 commodity bubble, and secondly in the aftermath of the Lehman bankruptcy, when they had to meet massive USD demand from capital going back to the US. There’s also what looks like some intervention in mid-2009 to limit the Ringgit’s rise, but it didn’t amount to very much.

But if you take 2010 in isolation, there’s been little movement in international reserves, despite the Ringgit 10% increase.

One last thought: regarding Raymond’s last line, there has and always will be enough gold to redeem all the world’s currencies. All you have to do is revalue gold accordingly…by about a minimum of around 300%-400%.

2 comments:

  1. Check out another article about the ringgit, which misses the target rather badly. http://www.themalaysianinsider.com/opinion/article/beware-the-ringgit/

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  2. Thanks, I've just posted on it.

    My, that's a juicy target.

    ReplyDelete