Central Bank Governor, Tan Sri Zeti Akhtar Aziz appeared at a press conference yesterday to give a statement on many issues.
Most important was Bank Negara position to not peg the ringgit or institute capital control in the light of weakening Malaysian ringgit [read MMO here].
Since returning to the old peg level of 3.80, there had been much attention to the declining ringgit that the public may not be concerned on 1MDB anymore. This week alone many articles generated in the mainstream and circulating in the social media [read The Star's Currency War on Wednesday].
The public is talking a lot on the currency market that suddenly everyone is an expert. With many Malaysian blaming the government, Goh Wei Liang wrote a posting with the cynical title Malaysians are now currency experts? in defense.
Goh is still polite because as a former currency trader, we would have told off these instant experts to stop bullshit-ing. And we have seen many.
Nobody can claim expert because no one can say with absolute confidence on what are the determinants of a currency value, let alone a "third currency" or minor currency like ringgit. Having lost RM16 billion, Tan Sri Nor Mohamed Yakcop would be the last to claim as expert.
Presumptous
Malaysians are making a lot of presumptions on the ringgit decline, complaining of higher import affecting business, and claiming the reason being the decline in confidence with the leadership. We will not argue against the last claim.
With Malaysians getting more closed minded and myopic with the growing freedom, it is pointless to tell them that there are two or three more significant variables are in play. Thus the political reasoning could not be single out as THE reason.
The usual factors cited as affecting the conversion of one currency against another currency are differentials in inflation, differentials in interest rate, current account deficit, terms of trade, public debt, and political stability and economic performance [read Investopedia here].
For us, it is still mere indicators or proxies and not factors with direct impact on the value.
Currency value is determined by an open informal market of electronic links between banks and brokers, which trades non-stop from the moment it opens Monday morning in New Zealand till it close for the weekend on Friday evening in San Francisco.
In the world of currency trading, 90% of trades are speculative in nature and 5-10% are based on genuine commerce and trade. It is the decision making process of traders that determine currency conversion value and not so much economic data.
Economic data are lagged, usually one to three months behind. It is not current.
The traders in front of computer screen and in the pit wants to know the future economic trend not prehistoric ones. They need to make the decision to buy or sell dollar within the allowable exposure limit given to make money for the bank and themselves. Lose money they get the boot and do nothing no need to wait for the month-end P&L to get boot out.
Most currency traders trade on very short term to seize on the market natural vibrations. They could be using charts, wave theory, genetic algorithm, stars and horoscope and even fung shui to determine trend and overbought/oversold condition. These are jobbers that provide liquidity in the market.
They are in and out on the mere profit or stop loss of few pips (1 pip is 0.0001). One moment they bullish and long on dollar, but in a moment they could go short to a market seen as overbought. Economic numbers are meaningless because they trade based on sentiment and market trend of the day.
Their presence explains the reason our Masters adviser could only achieve a low 65% correlation coefficient in his attempt to make an econometric model of US/Ringgit back then. We did warn him to not waste time with the attempt.
Nevertheless, on the other end of the scale, there are traders or investors that trade on major structural economic trends. However, they are only an elite few. Most of time, management could not stomach the unrealised lost as they stick it through the market ups and downs.
Ultimately, the basic and direct reason that determine currency value is the order flow.
As our Irish Professor in Treasury Management, who was a former trader at Barclays Bank, London described it is the real supply and demand of currency. However, a glimpse of the information (still indicative) is only available with major trading banks who could see the direction of the flow.
Read this 1992 article here in the The Independent of UK on the Inside Story: Money Trade for a background story on the life of currency traders.
Ringgit decline
Goh Wei Liang highlighted something the public had wrongly made simplistic presumption.
All currency in the world are traded as the currency against US dollar. Conversion to other currencies will involve a two trade mechanism of buying US dollar against the original currency and sell that US dollar to get the desired currency.
There is a certain degree of panic among the public as US/dollar ringgit reached the previous peg level of 3.8000 and now as surpass the 4.0000 mark. That is against US dollar but what should matter most is ringgit against other major trading partner. So Goh pointed out that ringgit weakened against US dollar but strengthened against other currencies.
For the public to be unnecessary panic, he pointed out that unless one is dependent to the US dollar in our life then the panic is unnecessary.
Quite a number of Malaysians are panicking to the point of calling for ringgit to be peg and a capital control policy put in place. Rocky quoted Dato Abdul Wahid Omar here to highlight that the situation now is far different than in 1998 [read here] to warrant such measures.
The ringgit decline is not catastrophic in nature and there is no concerted currency attack in play. Ringgit is declining against US dollar simply because the US dollar is bullish and US interest rate is expected to rise. There will come a point the interest rise is counter productive to the US dollar, so why panic?
The ringgit decline is also compounded further by the devaluation on the Yuan. That is unexpected and catastrophic in nature but still part and parcel of market.
Ringgit decline will affect importers and maybe many Malaysians are complaining because they are too dependent on foreign goods and parts. Is that the government's fault?
The decline in ringgit is not a new phenomenon. It has been happening for more than a year. Sometime last year there was complain that ringgit is too strong and making our exports out-priced. Market talk was the decline was started by capital flights by Malaysian billionaires.
Public only realised when The Edge's Dato Tong Kooi Ong was accused of plotting to weaken the ringgit as part of a grandplan to topple the government. A story line which emulate the reformasi days of 1998-2000.
In Goh's latest posting here, he explores the relationship between commodity prices with ringgit as he claim ringgit begin to weaken as far back as 2010/11 when commodity begin to decline.
It is a good read but as we said earlier, it is an explanation of the past to soothe the panicking Malaysians. Again, it is not government fault and no need to intervene since the movement is not a panic run.
For traders who are the one having direct hand in determining the ringgit value, it mean nothing to them. As we did in our trading days, economic is just useful material to ya ya and bullshit the Business reporters. It don't mean a thing anymore in the market place.
That is unless it is some unexpected numbers not known yet.