Before I embark on my new radical thesis, just have a look at a report from the EdgeFinancial Daily which I have edited for easy reference.
The coming two weeks are crucial for the global foreign exchange (forex) market as how the US dollar fares during this period will determine whether it can be sustained at a key level against other major currencies. Some observers suggest that the forex market is now at a crossroads as investors’ perception on the direction of the greenback would determine if the currency could sustain its gains in the near future. The key levels for the US dollar against the major currencies are US$1.30 to the Euro, US$1.70 to the pound sterling, 95.71 yen to US$1, US$0.60 to A$1, US$0.53 to NZ$1, CAN$1.20 to US$1 and 1.2 Swiss franc per US$1. It is said that these levels will act as crucial barriers in the near term. Breaking out of these levels will further cement the US dollar’s strength and provide policymakers the ability to manoeuvre away from cutting policy rates or at least limiting the incentive to ease monetary policy in future.
Lower US interest rate made the US currency an attractive substitute for the yen, as the US rate is just 100 basis points (bps) above the Japanese policy rate. Most of the global currencies continued to depreciate yesterday despite a coordinated move by several central banks to lower their overnight interest rates in an attempt to stem the worst global financial crisis since the 1930s. The United States Federal Reserve as well as the central banks of China, the Euro zone, Britain, Canada, Sweden and Switzerland cut their interest rates by 50 bps yesterday. The Australian central bank cut its interest rate by 100 bps two days ago. Analysts also note that apart from interest rates, the other factor that impacted the forex market is the question of whether investors and banks have enough funding to trade in currencies. The costs of funds are higher because banks are worried about counter-party risks and have refused to lend money.
The Aussie and New Zealand dollars are facing a more severe depreciation because they were high-yielding currencies and now face erosion on rates. The impact was great when the central bank of Australia cut its key interest rate. The decline is said to have been contributed in large part by hedge funds unwinding their Aussie and NZ dollar positions.
What the report is saying is that the forex market is going to be very volatile in the coming weeks and months. People like to show that they are financially savvy by saying going forward. I prefer to be old school with the phrase in the coming weeks and months. Maybe nebulous expressions like going forward has contributed to the market turmoil since the phrase has no reference whatsoever to time-frame. Going forward could mean the next day. It could mean next week or, next month. Could it also mean never? But ... I digress.
.
.
Back to the issue at hand, forex volatility.
Where is the Ringgit going to be in this combustible millieu? Maybe some economist that deign to read this humble blog can enlighten us all.
But, pending such wisdom being imparted, I will hazard any errors and omissions by soldiering on.
There is every likelihood that the Ringgit will not be immune to forex volatility. There will be collateral damage from shrapnels coming from currency explosions in trading partners.
Fortress Malaysia
While Najib savours the imminent and, possible, taste of ultimate power as the outright leader, Malaysians need to remind him that he is the newly appointed Minister of Finance. He needs to remember that he is now responsible to all Malaysians to preserve, protect and advance the financial and economic health of Malaysia.
.
.
One of the things he should do, if I may be so bold, is to reconsider Dr M's suggestion about re-pegging the Ringgit.
Najib needs to recall recent Malaysian history where, with some perspective of time, Malaysians can quite objectively say that during the 1998 economic crisis, in the midst of the insanity, the man who kept his cool and, dared to ask stupid and, obvious questions about economic, market and financial principles, was Dr M.
This is what Najib needs to do. Instead of dismissing Dr M's suggestion on re-pegging, he should take serious time out from politicking and, not only meet with savvy financial engineers and do, passive listening. He needs to have the courage to ask some stupid questions. Like, how is the value of the Ringgit determined? What are the implications of re-pegging? What are the implications of NOT re-pegging?
Re-pegging can ring-fence and, protect the Malaysian economy to a larger extent than to leave the Ringgit fluttering in the winds of financial turmoil.
I get worried when Najib, as Minister of Finance I, says that Malaysia's economic fundamentals are sound. That is a cliche used by people like George W. Bush in the face of economic turmoil. It is a catch-phrase that contains a boldly underlined subtext, "I have no idea what's going on".
.
.
We need to tell Najib, since he's the current Minister of Finance I, that he must look into the fortification of our economic defenses. Re-pegging is one bulwark that Malaysia may need very, very soon. It will give certainty to Malaysia's economy at a time when there are so many uncertainties.
The coming two weeks are crucial for the global foreign exchange (forex) market as how the US dollar fares during this period will determine whether it can be sustained at a key level against other major currencies. Some observers suggest that the forex market is now at a crossroads as investors’ perception on the direction of the greenback would determine if the currency could sustain its gains in the near future. The key levels for the US dollar against the major currencies are US$1.30 to the Euro, US$1.70 to the pound sterling, 95.71 yen to US$1, US$0.60 to A$1, US$0.53 to NZ$1, CAN$1.20 to US$1 and 1.2 Swiss franc per US$1. It is said that these levels will act as crucial barriers in the near term. Breaking out of these levels will further cement the US dollar’s strength and provide policymakers the ability to manoeuvre away from cutting policy rates or at least limiting the incentive to ease monetary policy in future.
Lower US interest rate made the US currency an attractive substitute for the yen, as the US rate is just 100 basis points (bps) above the Japanese policy rate. Most of the global currencies continued to depreciate yesterday despite a coordinated move by several central banks to lower their overnight interest rates in an attempt to stem the worst global financial crisis since the 1930s. The United States Federal Reserve as well as the central banks of China, the Euro zone, Britain, Canada, Sweden and Switzerland cut their interest rates by 50 bps yesterday. The Australian central bank cut its interest rate by 100 bps two days ago. Analysts also note that apart from interest rates, the other factor that impacted the forex market is the question of whether investors and banks have enough funding to trade in currencies. The costs of funds are higher because banks are worried about counter-party risks and have refused to lend money.
The Aussie and New Zealand dollars are facing a more severe depreciation because they were high-yielding currencies and now face erosion on rates. The impact was great when the central bank of Australia cut its key interest rate. The decline is said to have been contributed in large part by hedge funds unwinding their Aussie and NZ dollar positions.
What the report is saying is that the forex market is going to be very volatile in the coming weeks and months. People like to show that they are financially savvy by saying going forward. I prefer to be old school with the phrase in the coming weeks and months. Maybe nebulous expressions like going forward has contributed to the market turmoil since the phrase has no reference whatsoever to time-frame. Going forward could mean the next day. It could mean next week or, next month. Could it also mean never? But ... I digress.
.
.Back to the issue at hand, forex volatility.
Where is the Ringgit going to be in this combustible millieu? Maybe some economist that deign to read this humble blog can enlighten us all.
But, pending such wisdom being imparted, I will hazard any errors and omissions by soldiering on.
There is every likelihood that the Ringgit will not be immune to forex volatility. There will be collateral damage from shrapnels coming from currency explosions in trading partners.
Fortress Malaysia
While Najib savours the imminent and, possible, taste of ultimate power as the outright leader, Malaysians need to remind him that he is the newly appointed Minister of Finance. He needs to remember that he is now responsible to all Malaysians to preserve, protect and advance the financial and economic health of Malaysia.
.
.One of the things he should do, if I may be so bold, is to reconsider Dr M's suggestion about re-pegging the Ringgit.
Najib needs to recall recent Malaysian history where, with some perspective of time, Malaysians can quite objectively say that during the 1998 economic crisis, in the midst of the insanity, the man who kept his cool and, dared to ask stupid and, obvious questions about economic, market and financial principles, was Dr M.
This is what Najib needs to do. Instead of dismissing Dr M's suggestion on re-pegging, he should take serious time out from politicking and, not only meet with savvy financial engineers and do, passive listening. He needs to have the courage to ask some stupid questions. Like, how is the value of the Ringgit determined? What are the implications of re-pegging? What are the implications of NOT re-pegging?
Re-pegging can ring-fence and, protect the Malaysian economy to a larger extent than to leave the Ringgit fluttering in the winds of financial turmoil.
I get worried when Najib, as Minister of Finance I, says that Malaysia's economic fundamentals are sound. That is a cliche used by people like George W. Bush in the face of economic turmoil. It is a catch-phrase that contains a boldly underlined subtext, "I have no idea what's going on".
.
.We need to tell Najib, since he's the current Minister of Finance I, that he must look into the fortification of our economic defenses. Re-pegging is one bulwark that Malaysia may need very, very soon. It will give certainty to Malaysia's economy at a time when there are so many uncertainties.
For an excellent summary of currency pegs go to Wikipedia on fixed exchange rate.
5 comments:
Of most concern to Southeast Asia, however, is the dearth of foreign investment. Private capital flows have contracted in Indonesia, Malaysia, and Thailand for three years running. This year, they will probably fall again. And multinational manufacturers are cutting back. This month, Seagate Technologies Inc. said it would shutter a Malaysian plant making hard-disk drives. It earlier scrapped plans for a new factory in the Philippines.
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Sandy Romeo
white hat seo
brother,
this is a very solid piece to which i am in full agreement. i have said, the current finance minister has cavalierly dismissed the idea of re-pegging. and i have also said, in all honesty, that if you were to ask me, who is the greatest malaysian economist, its dr mahathir( a medicine man!). like you said- one needs to maintain a cool head and be willing to ask stupid questions.
Bro Sakmongkol
From the economic standpoint, things are going to get crazier for Malaysia. We are not immune. We need a clear-thinker who is honest about being ignorant and ask hard (albeit stupid-sounding questions).
As a matter of interest, they are now saying the same thing in the U.S. When Greenspan supported derivatives, Congressional and Senate leaders did not want to sound ignorant and did not dare to ask him what the heck derivatives were.
A case of the financial equivalent of the "emperor with no clothes" fable?
sandy223,
You're correct. Unemployment arising from business closure is a serious matter. The implosion can come from U.S. technology giants in Malaysian industrial estates.
The Malaysian economic planners had better to anticipate all this. It will cause social disruptions and unnecessary pain to Malaysia.
Sir
Could you care to comment on today's article with regard to the possible default of Lehmans usd360bn CDS guarantee call up?
http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article4922981.ece
Here are the pertinent para's:
>
An auction of Lehman’s bonds yesterday determined that the bank’s borrowings were worth only 8.625 cents on the dollar. The valuation leaves the insurers of the debt a bill of about $365 billion. It is not clear whether the insurers, which are required to settle the bill in the next two weeks, will be able to pay – a development that could further undermine increasingly stressed capital markets.
>
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About 350 banks and investors are thought to have insured an estimated $400 billion of Lehman’s debt through complex derivatives, known as credit default swaps. These include Pacific Investment Management, the manager of the world’s largest bond fund, Citadel, the US hedge fund, and American International Group, the insurer that the US Government recently bailed out with two loans totalling about $123 billion.
>
To get banks/insurance co's to cough up usd 360bn in the current market is going to cause further downward pressure given the current state of the capital markets.
I think that we will be hearing more fireworks in the next two weeks State-side.
In the days of yore (before the current financial crisis), I would gladly guarantee Lehman Brother's loan notes and collect 7% indemnity insurance payment!
tau
This latest scenario involving Lehman Bros products points to 2 things:
1. MAJOR TACTICAL ERROR - Paulson, Bernanke, SEC and US govt made a huge mistake in being doctrinal about a "deregulated capital market" where an "invisible hand" was restore the cosmic order through the basic laws of supply and demand.
They forgot that many financial lives were at stake and, even the fate of the U.S. economy.
With the benefit of hindsight, of course, many now say that the US govt's biggest mistake was to let Lehman die a natural death instead of being bailed-out. The Lehman debacle made the economic turmoil real. It brought the turmoil at Wall Street into the lives of big and small investors of Lehman products throughout the world.
This leads to my second point.
2. CATALYST FOR CONFIDENCE CRISIS -Even the little lady who put her life savings into a Stanchart Hongkong "structured fund" without capital guarantee got hit because Lehman products formed the bulk of the portfolio for the structured fund. Incidents like this, multiplied a thousandfold, creates the CRISIS OF CONFIDENCE.
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