Wednesday, October 27, 2010

Zeti Says: No Sudden Moves

On Bloomberg today:

Malaysia’s Zeti Doesn’t Want ‘Sudden’ Currency Moves

Oct. 27 (Bloomberg) -- Malaysian central bank Governor Zeti Akhtar Aziz said she doesn’t want to see sudden currency moves and expressed concern that global policy makers may rely too much on exchange-rate changes to deliver sustainable growth…

…Bank Negara Malaysia should watch the ringgit’s “underlying trend” and wants gradual moves, Zeti said. Malaysia’s currency reached a 13-year high this month.

“There’s an over-focus on the exchange rate for adjustment to take place,” Zeti, who helped oversaw [sic] the removal of Malaysian currency controls in 2005, said in a Bloomberg Television interview broadcast today. “If you want to unwind global imbalances, it should comprise of adjustment in demand, in prices and in the exchange rate. If we overly rely on any one of these, it’s destabilizing for the global economy.”…

…“The underlying trend for us has been an appreciating currency,” Zeti said. “But, in order for the currency to reflect the underlying fundamentals, this has to take place over a period of time. We don’t want to see sudden movements. It has to be a gradual adjustment.”

…Malaysia’s currency has appreciated 10.3 percent this year, the second-best performance in Asia excluding Japan, even as the government reported that the nation’s export growth slowed every month since March. The Thai baht gained 11.5 percent to also trade near its strongest level since 1997.

The way I read this is that BNM is comfortable with a Ringgit appreciation, but will intervene if it moves too fast in either direction. What the parameters might be for BNM to intervene in the Ringgit exchange rate remains unsaid, though an examination of daily trading ranges might yield some insight.

I was of the opinion that the Ringgit was slightly overvalued at the end of 2007, which somewhat justifies the pullback that we saw in early 2008. Now, two years down the road and with recovery well-entrenched, I’d say its now close to fair value over the short term, but with a medium term bias towards strengthening further. With the forex market’s tendency to overshoot, I wouldn’t bet against a breach of the RM3.00 to the USD level by early 2011.

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