Friday, May 8, 2015

BNM Watch: No Change, And Don’t Expect Any

Yesterday’s MPC decision came as no surprise, with the OPR held steady at 3.25% (excerpt):

Monetary Policy Statement

At the Monetary Policy Committee (MPC) meeting today, Bank Negara Malaysia decided to maintain the Overnight Policy Rate (OPR) at 3.25 percent.

The global economic expansion remains moderate, with divergent growth momentum across economies in the first quarter of 2015…Downside risks to this outlook, however, continue to persist. In this environment, the international financial markets will continue to be affected by shifts in global liquidity and investors sentiments.

For Malaysia, latest indicators suggest that domestic demand has continued to support growth in the first quarter. Looking ahead, the prospects are for the Malaysian economy to remain on a steady growth path, with domestic demand remaining as the key driver of growth….

…For the rest of the year, headline inflation is expected to trend higher given the impact of the implementation of the GST…Underlying inflation is expected to remain contained amid the stable domestic demand conditions.

At the current level of the OPR, the stance of monetary policy remains accommodative and supportive of economic activity…While the risks of destabilising financial imbalances are contained, the MPC will continue to monitor these risks to ensure the sustainability of the overall growth prospects.

I think the important bit is that very last line, with the mention of financial imbalances, which basically signals that there won’t be a change in the policy interest rate for the foreseeable future, unless something really drastic comes up.

That doesn’t include a dip in growth in 2Q15 – we would expect to see a transitory drop in private consumption growth (or even a contraction) given the introduction of GST. I don’t think that would be enough to make the MPC change its minds.

11 comments:

  1. Just wondering dude...sometime around Feb 2 in response to my MYR "rigging" claim, in your riposte you penned this:

    "Oh BTW, at current Brent prices, we've pegged short term fair value for USDMYR at RM3.52. Interest parity model puts it at RM3.45 as at end January. In many ways, this is really a sell down based on fundamentals."

    At that time Brent was hovering around US$51 per barrel with the market USD/MYR rate being 3.63

    Fast forward to today and Brent is at US$66 per barrel, a roughly US$15 hike, but the MYR is stuck at 3.60 to the US$.

    Question is, not that I am resurrecting my dead horse (I don't flog dead horses....hahahaha),I was just wondering about the discrepancy in the above data i.e., large discordance between fair value estimations and market valuation. Wonder why?

    And is this a sign that oil price down, ringgit down correlation thingy is unraveling or was it just happenstance after all? And if that nexus is outta the window, what can be the cause for MYR' torpor as export numbers are still very healthy.

    A US dollar for your thoughts, dude....hahahahaha

    Warrior 231

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    Replies
    1. @Warrior

      Dude, really, for some one who's as well read as you are, you've somehow missed on this particular topic.

      Deviations between market value and fuindamental valuation of the exchange rate are the norm, not the exception.

      Nobody, and I mean nobody, has come up with a really satisfactory model of how exchange rates move, or how fundamentals (or even which fundamentals) go into their determination.

      The seminal paper on this is Meese and Rogoff (1983):

      https://ideas.repec.org/a/eee/inecon/v14y1983i1-2p3-24.html

      Periodic revisiting of the subject by academics have not seen much improvement. Generally, the half life of deviations between market and fundamental values last between 3-5 years - some have found shorter periods, but I don't believe I've ever seen one less than a year.

      Then there's the problem of determining what we mean by fundamental value. Try here for an overview, plus the modelling approaches:

      http://www.bankofengland.co.uk/research/Documents/workingpapers/2004/wp248.pdf

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    2. You might also want to refer to this:

      http://en.wikipedia.org/wiki/Overshooting_model

      and some additional reading:

      http://www.imf.org/external/pubs/ft/staffp/2001/00-00/pdf/kr.pdf

      http://www.hks.harvard.edu/fs/jfrankel/API120/ls/L20MonModelExR-RD.pdf

      Ironically, I had to explain this model to someone this morning.

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    3. There are nefarious interests who are conspiring to keep the Ringgit well-shorted and depressed, regardless of "fundamentals".

      Now, who has the firepower and the muscle to be able to engineer and sustain this?

      No prizes for the right answer, though!

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    4. Something else for your amusement:

      http://en.wikipedia.org/wiki/Exorbitant_privilege

      http://www.mckinsey.com/insights/economic_studies/an_exorbitant_privilege

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  2. Note: Third time putting this up. Means I am banned from this blog?

    Hi dude, Here are some interesting questions to ponder and respond to. A paisa for your thoughts…hahahaha:

    Q1 : At Brent price US$ 52 FV for MYR is set at 3.51 as per your comments. At Brent US$ 64 (today’s price) FV for MYR should be in the late 3.30s or early 40s right, given the US$12 premium for Brent?

    Given that projection, the MYR latest rate of 3.63 to the USD is an overshooting from FV or, in common parlance, the MYR is undervalued, right? And bear in mind, I am not looking for parity between FV and MV given other variables etc coming into play….and the fact that no FV=MV has ever existed for that matter!!

    Question 2 : Why the overshooting of almost 22-25 cents when all fundamentals are basically intact. Discrepancies would exist but I would think that would be within a reasonable range of 3-5% over FV. Even taking the 5% extreme that would mean a MV of approximately MYR 3.57 to the USD if FV =3.40.

    Is there something else, you know, some other “noise” that is accounting for the difference, no prizes for guessing right (wink….wink). Or is it normal that they overshoot or undershoot “extremely”?

    More importantly after digesting the notion of FV which is derived from PPP, from the various sources you provided me (thanks dude), I am beginning to be skeptical of the whole notion even allowing for these:

    http://www.euromoneyconferences.com/downloads/fxuk/deutsche.pdf

    http://www.piie.com/publications/chapters_preview/360/2iie3519.pdf

    The reason being, the trend of overvaluation and undervaluation from FV is sometimes…or should I say often divorced from real world fundamentals. I got this feeling after playing around here with regard to PPP:

    http://data.worldbank.org/indicator/PA.NUS.PPPC.RF/countries/1W-MY-NO-SG-KR-GB?display=graph

    You will notice that (given a figure above 1 indicates overvaluation and below 1 =undervaluation) certain currencies have remained in a coma tossed state of “overvaluation” or “undervaluation” for umpteen years. Cue Norway ( from 1981) despite North Sea Oil virtually drying up and all plus South Korea despite all that economic boom times 2004 onwards …and Malaysia’s virtually stagnates from 2005 onwards!! .

    Maybe PPP is not a good enough “variable” to anchor the model (maybe other things like degree of convertibility i.e, managed or free floating, debt to GDP etc should be given more weightage….i dunno…I am not the economist ; D ) or the model is too simplistic in its assumptions having discounted a lot of other problematic stuff….again I am just guessing.

    I am not saying I am tossing it outta the window but as they say, healthy skepticism is good for the constitution…hahahaha

    Warrior 231

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    Replies
    1. @Warrior

      For some reason, Blogger thinks you're a spammer. Sorry, nothing I can do about that one.

      On the your quesries:

      1. About right I think

      2. The extent of overshooting tends to be correlated to the degree of resistance to market adjustments. Contrast for example what happened to the Russian Rouble relative to other oil producers with floating currencies.

      For a quick and dirty way of figuring out whether there is some outside factor in the Ringgit exchange rate, try looking at the cross rates versus the AUD, CAD and MXP:

      http://fx.sauder.ubc.ca/data.html

      Australia and Canada have close to the same ratio of trade exposure to oil & gas (plus iron ore in the case of Australia), while having smaller impacts on their fiscal side. Mexico has a slightly higher trade exposure (more oil than gas relative to Malaysia), as well as a slightly larger fiscal impact. Mexico also has a slightly lower credit rating to boot.

      All four currencies have tended to trade in a fairly tight range (as these things go). If there's a concerted effort to sell down the Ringgit, it's part of a general sell down, and not something specific to Malaysia.

      3. On PPP, the academic consensus is that strong PPP does not hold (i.e. the law of one price is false) but weak PPP does (relative differentials are stable and mean reverting). The explanations of why that is tend to revolve around trade frictions (transportation costs, tarifss etc), and non-tradeable inputs (land, labour etc). You can find a good overview of the phenomenon here:

      https://www.imf.org/external/pubs/ft/wp/2001/wp01174.pdf

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    2. Hey dude, I didn’t have much time to look at all three currencies so I just looked at two, namely the Canadian loonie and the Aussie D given these two countries were mentioned in a post of yours sometime in late January, I think.

      Now a friend of mine kindly provided me this as a snapshot thingy and I am using especially page 5 of the FOREX Annex for this brief write up:

      https://www.nbc.ca/content/dam/bnc/en/rates-and-analysis/economic-analysis/forex.pdf

      Now FV for the Canadian loonie was set for USD 0.84 cents for Q12015 :

      http://www.theglobeandmail.com/report-on-business/top-business-stories/canadian-dollar-now-at-fair-value-and-soon-to-be-unfair/article22446079/

      and despite all the doom talk, it still loitered around 0.79 cents in March:

      http://www.theglobeandmail.com/report-on-business/top-business-stories/canadian-dollar-now-cheap-on-all-metrics-poised-for-rebound-socgen/article23278687/

      And the FV for the Aussie D was set for short term at USD 0.78 cents which was bull’s eye by the way, evidence courtesy of my mate’s Hodge NAB’s gift horse:

      http://business.nab.com.au/australian-markets-weekly-aud-valuation-metrics-whats-fair-9726/

      Paragraphs from short term value onwards are pretty illuminating and instructive.

      The key takeaway from the above is that despite depreciation hitting both currencies due to shared circumstances in most instances, the MVs do not diverge much from the FV projections, sometimes even hitting bull’s-eye. Not to the extent of a 5% or more deviation.

      The story is different here at home sweet sourpuss home. The MYR topped 2.97 or thereabouts but has plummeted almost 60 cents to USD and if you observe since October or thereabouts that slide has not been a pretty watch. Mind you, fundies are intact - read healthy exports, widening surplus, consumption still relatively hot and GDP topping forecasts but the MYR is in torpor. Now that’s an arse scratcher isn’t it ….hahahaha but seriously, I suspect there is a deafening “noise” that is shouting the MYR down. And I think this fella may be talking sense out of nonsense or is it the other way round:

      http://www.themalaysianinsider.com/malaysia/article/ringgit-depreciation-unexplained-says-expert

      Capital outflow? Speculators? .........oil may account for some of it but then again its up in the late USD60s now and don’t you think the effect would have been front loaded anyway?

      So there is something mysterious going on or the oomph has gone for some reason…Maybe you can figure it out better than I do. And certainly better than all those warring crackpot polytickians ever can . Now you understand why I favour level headed, rationale technocrats over tick infested polytickians anytime. And if ever I get into the hotseat, I am sure gonna “headhunt” people like you for a good cause of course while retaining the good lady at BNM who has done a solid job despite all the bricks and bats thrown at her lately. Stay cool Zeti..you still look cool to me….hahaha. see technocrat again!!

      In any case, the MYR’s current fate doesn’t concern me much as I don’t touch any toxic Asian stuff ex-Yen (when carry trade arises). It only saddens me for nostalgic reasons. Its essentially Loonies, Audies, Euros or Sterling if push comes to shove for me…ooops ..now you can guess why I am into this inexact pseudo-science….cari side makan mah….after all ..money makes money right….and ‘lil’ investments sure go a long way to feed my grass habit hahahaha …Now I will check out with a dong for your thoughts.

      Warrior 231

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    3. @Warrior,

      Sorry for the late reply. Today's the first day this week I've actually had a chance to sit down.

      1. As I think I've stated before, fundamental based models don't always do a good job - note for instance the last three paragraphs of the Aussie link you gave:

      http://business.nab.com.au/australian-markets-weekly-aud-valuation-metrics-whats-fair-9726/

      What I found funny was that they included gold, but not iron ore. And I favour using long rates (say, 10yr govt bond yields) instead of "adjusted" short rates to look at interest rate differentials. Different valuation models will give different estimates of fair value. Putting in more independent variables will give a better in sample fit (as NAB has done), but worse forecasting performance while simultaneously, by construction, reducing estimates of over- and under-valuation. This is the problem identified by Meese and Rogoff.

      2. I'm not sure that I would rely too much on what Dr Ariff says.

      3. Peak to trough for all four currencies against the USD (Jul-2011 to Mar-2015):

      AUD: 0.90916 -> 1.3117 +44.2%
      CAD: 0.9538 -> 1.2683 +32.9%
      MYR: 2.9658 -> 3.7031 +24.8%
      MXN: 11.725 -> 15.246 +30.0%

      I picked those dates because they approximate cycle highs and lows for all four (Mexico's peak was slightly earlier, but the rate was close to the same in July-2011).

      One reason for the difference is changes in central bank policy. Since the end of 2011, Australia has cut policy rates by 225bp (now 2.0%), Canada by 25bp (0.75%), and Mexico by 200bp (3.0%), while Malaysia has raised by 25bp (3.25%).

      http://www.centralbanknews.info/p/interest-rates.html

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    4. Due to time,some passing observation, clarification and notifications:

      Observation

      1.The apparently favourable pix that % have a peculiar way of depicting cannot mask the fact that in real terms, a roughly 74 cents decline is still twice that of Canada’s or Australia’s (Mexico is out as I admittedly didn’t look at their data. In any case your fundamentals were on Aussie and Canuck anyway)

      Notification

      2. The context of the peaks and troughs within the time span you mentioned is interesting. You see, mapping a Crude Oil price chart from the same period onto that of the Forex throws up some interesting findings. The overall narrative that emerges is that this is just a rerun of 1994 to 1997 when an earlier bout of bubble blowing ended in tragedy and misery for many for want of preemptive measures, lack of oversight or underlying signals being masked or mistakenly overlooked….that will be the juice for my next rant here....hehehehe

      3. Clarification

      In light of RM 11, to what extent is policy formulation in Malaysia, do you think, is shaped by what this cake, just hot off my oven, claims:

      http://www.nber.org/papers/w21174

      Interesting paper but one that is strangely at odds with actual findings here:

      http://www.wsj.com/articles/oecd-sees-continued-rise-in-growth-harming-inequality-1432198801

      which also sagely observes ( hahahahaha….wink wink…..):

      “If you reject equality of outcome as a goal in favor of equality of opportunity, you’re going to fail.”

      which by the way is further spun in a different way here ( He is not paragon, mind you):

      http://www.wsj.com/articles/better-than-raising-the-minimum-wage-1432249927

      Back to my actual Q pertaining to paper and finding :

      Is policy formulation a case of perception overpowering reality or reality checkmating perception here. My bet’s is that it should theoretically be on the latter. Wonder what yours will be?

      Ok, those fleeting thoughts will do for now…gotta run.

      Warrior 231

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    5. @Warrior

      1. In "real terms"?

      Take two balls and drop them. Ball 1 drops 10cm, ball 2 drops 6in. Which one falls further?

      2. I think the right historical period of comparison should be the late 1970s to the early 1980s, which saw a similar crash in commodity prices.

      3. The NBER paper is absolutely right. One could (and should) say the same thing about popular perceptions of inflation.

      Why do you think I'm data-centric? Policy should be based on evidence, not perception.

      In the Malaysian context, inequality has been slowly decreasing over the years, both between groups and within groups (with the exception of Malaysian Indians). So the idea that inequality is increasing is (probably) false, though I know Dr Muhammad might disagree with me (his latest yet to be published paper with Lee Hwok Aun using non-financial measures of inequality suggests, though doesn't "prove", increasing inequality).

      My stand is simpler - while Malaysian income inequality is decreasing (the data on wealth is mixed), it's not decreasing fast enough and is still too high. We appear to have hit a wall in terms of decreasing inequality further, which suggests structural changes are needed in the economy and government-citizen social contract.

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