BNM spent US$12b to defend ringgit in Sept, says Moody’s

Bank Negara Malaysia (BNM) is estimated to have spent US$12 billion (RM42.4 billion) during September to defend the ringgit, said Moody’s Economy.com.

Moody’s said the ringgit was among Asia-Pacific currencies that had depreciated despite current account surpluses, the others being the Singapore dollar and Philippine peso. “Sound current accounts may have created a bottom for these currencies and they have ‘only’ depreciated by 5% to 10% since June,” Moody’s Economy.com economist Tine Olsen said in her report yesterday.

She said other currencies in the middle group had fallen because of deleveraging, while those experiencing the biggest depreciation, including South Korea, Indonesia and India, also struggled with current account deficits.

Olsen said Asia-Pacific currency markets had been driven recently by the liquidity squeeze and by current accounts as risk-averse investors moved funds from high-risk markets to safe havens to avoid losses, and also to preserve liquidity.

These include the unwinding of carry trades — the repatriation of funds from high-interest countries to repay loans taken out in low-interest countries.

“As the liquidity crisis eases, investors turn their attention to economic fundamentals to determine the value of national currencies,” Olsen said.

She said the global economic slowdown had encouraged investors to avoid countries with deteriorating current accounts, as they feared export weakness would put downward pressure on currencies.

Source: Edge Daily

That is a lot of money used to defend the Ringgit. Why does the Ringgit need defending?

Why didn't the Governor of Bank Negara and the MOFs 1 and 2 heed the advice of Dr M and this blog (wink!) in Fortress Malaysia and Is the Ringgit better off on its own?

Now Malaysia has spent (earlier I used the word "lost") USD12 billion or RM42.4 billion. This is a forex positioning that is fraught with risk.

Will Najib, as MOF1 stand in Parliament tomorrow to explain this issue? Malaysia needs an explanation of the forex defence strategy. What was and, is, the strategy?

UPDATE Nov. 5: For a holistic view, consider this description of forex trading by central banks:

National central banks play an important role in the foreign exchange markets. They try to control the money supply, inflation, and/or interest rates and often have official or unofficial target rates for their currencies.

They can use their often substantial foreign exchange reserves to stabilize the market.

Milton Friedman argued that the best stabilization strategy would be for central banks to buy when the exchange rate is too low, and to sell when the rate is too high — that is, to trade for a profit based on their more precise information.

Nevertheless, the effectiveness of central bank "stabilizing speculation" is doubtful because central banks do not go bankrupt if they make large losses, like other traders would, and there is no convincing evidence that they do make a profit trading.

The mere expectation or rumor of central bank might be enough to stabilize a currency, but aggressive intervention might be used several times each year in countries with a dirty float currency regime.

Central banks do not always achieve their objectives. The combined resources of the market can easily overwhelm any central bank. Several scenarios of this nature were seen in the 1992–93 collapse, and in more recent times in Southeast Asia.

Also consider this description:

Large reserves of foreign currency allow a government to manipulate exchange rates - usually to stabilize the foreign exchange rates to provide a more favorable economic environment.

In theory the manipulation of foreign currency exchange rates can provide the stability that a gold standard provides, but in practice this has not been the case. There are costs in maintaining large currency reserves.

Fluctuations in exchange markets result in gains and losses in the purchasing power of reserves. Even in the absence of a currency crisis, fluctuations can result in huge loses. For example, China holds huge U.S. dollar-denominated assets, but the U.S. dollar has been weakening on the exchange markets, resulting in a relative loss of wealth.

In addition to fluctuations in exchange rates, the purchasing power of fiat money decreases constantly due to devaluation through inflation. Therefore, a central bank must continually increase the amount of its reserves to maintain the same power to manipulate exchange rates.

Reserves of foreign currency provide a small return in interest. However, this may be less than the reduction in purchasing power of that currency over the same period of time due to inflation, effectively resulting in a negative return known as the "quasi-fiscal cost". In addition, large currency reserves could have been invested in higher yielding assets.

Finally, consider Dr M's latest view, a radical one, which supports the gold standard or what Dr M terms as Dinar Emas. It's interesting.