Monday, May 9, 2011

1Q 2011 Forex Review: BNM Is In The Market

After months of relative quiescence, BNM has returned to the forex market with a vengeance. Something about approaching the RM3.00 to the USD level must have triggered alarm bells, because the scale of intervention is almost without precedent (change in international reserves; adjusted for forex valuation):


In total quantum, the change in international reserves indicates forex intervention that beats anything BNM has done in the past decade. Next month’s monetary conditions review will be really interesting, because we’ll get to see how much of that was sterilised – or not.

Things don’t look quite so dramatic when scaled to market volume though:


I’m assuming here that forex trading volume is approximately at the same level as last month’s, which isn’t a totally reasonable assumption. With that caveat, intervention in April still approaches the scale of intervention during the pre-2005 period, when the Ringgit was tied to the USD.

It’s interesting to speculate over BNM’s motives here. On the one hand, the Governor has been outspokenly in favour of a free floating currency yet April’s operation suggests that “fear of floating” continues be a consideration. The scale of intervention suggests that this is more than just BNM making a point to the market.

The fact of the matter is, despite the gains the MYR has made against the USD (and they haven’t been much, honestly speaking), the Ringgit has been in a holding pattern for the past year (trade weighted index; 2000=100):


So there hasn’t been much in terms of forex movement to really justify intervention. Even against the USD, we’re barely past the 2007 peak (USDMYR index; 2000=100):


Against most East Asian currencies, the Ringgit has made solid gains, but much of these gains were made over 2009-2010. Nothing justifies a move right now (cumulative log difference; sample: 2005m7-2011m4; 2000=100):



So, where’s the beef?

The best reason that comes to my mind is that there must have been excessive capital inflows in April, enough to cause concern. High forex deposits in the banking system could lead to higher forex borrowing by domestic enterprises, which raises the pain under a sudden-stop scenario. Domestic credit creation is running high already.

Shades of 1997? That’s certainly a more logical explanation than “fear of floating” or the Ringgit passing the psychological RM3.00 barrier. The fact that the Ringgit has continued to reach new highs against the USD in April, despite intervention, lends some credence to this rationale – there’s so much action going on that RM45 billion worth of USD purchases barely caused a pause in the Ringgit’s upward movement.

I don’t know that it would have been better to just let the Ringgit rise, and reserve ammunition for solely managing domestic monetary conditions. Full sterilisation of April’s intervention might have raised BNM’s outstanding bills by 50%. Along with the hike in the OPR, I’m positive we’ll see a rapid expansion of bills issuance in April-May – sterilised intervention can get expensive mightily fast.


I thought I’d have to wait til the April figures came out before I could get a handle on how much capital flows were coming in. Turns out there’s already some indications in March (RM millions):


Money market volume for March was well over double the average for the past year. A lot of people think that the equity markets are well valued, so a lot of action has been in debt instruments instead. Trading in BNM bills shot up 50% over last year’s average, while MGS volume has tripled.

So now we have some basis for BNM’s intervention, and possibly further corroboration for the hike in the OPR – BNM’s gone bull-trapping.

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