A bit of forex: the Yen

Usually forex is outside the scope of this blog, but I will comment occasionally since we have many forex traders in Malaysia.  Furthermore, being Friday, not much is happening in Malaysia.  So I want to comment about the Yen.

Probably everybody and his mother is short the Yen at this point.  But One big reason not to be is the Euro.  Probably one of the bigger contrarian trades this year is to long the Yen.  or at least to take off the position.  Why?  After all Japan is still implementing QE, etc.

When everyone is doing it, it becomes the status quo.  What is different then, when the Yen started collapsing ,and now?  One major difference is Europe.  Europe hadn't implemented their QE program then.  Now that they have, the Yen is a lot more appealing than before.

As of the moment, the 10 year bonds from the US are also rising to an all time high due to QE from Europe.  The bear case for the Yen is no longer applicable unless Japan doubles its QE program. From a Yen standpoint Japan's QE program probably won't destroy their currency as badly as many people are anticipating.

Zeti speaks on strong ringgit fundamentals

From the Star:

PUTRAJAYA: Bank Negara Malaysia governor Tan Sri Dr Zeti Akhtar Aziz says the ringgit is fundamentally strong and “it will reflect the underlying fundamentals when the global events settle down”.

She also said on Tuesday Malaysia’s financial system can ride out the capital inflow and outflow.  Zeti added Malaysia's GDP for 2014 was also within the forecast.

She also said BNM would not allow any “systemic” effect from any individual company to affect the country’s economy.

The Edge weekly also commented on a speech by Prime Minister Najib regarding the Ringgit fundamentals.  But if the fundamentals were so good, why is the Ringgit is suffering the most in the region?

Even Zeti is becoming more vocal about the "fundamental" strength of the Ringgit.  Is the Central Bank going to put its money where its mouth is and shore up the weakening Ringgit?  probably not.

It seems panic is spreading a bit as no matter what either leader says, the Ringgit just won't wake up.  Ever since the capital controls statement on Reuters by Zeti, the Ringgit has done nothing but tank.  It's as if the market says keep talking, I'll just keep pushing your buttons.

Finance Minister Zeti speaks up on Capital controls

From the Edge:

 Malaysia has "moved on" from using controls to manage capital flows, its central bank said on Friday, signalling it would not resort to such measures amid a falling currency and slowing economic growth.

"Extreme measures such as capital controls are for extreme periods. We are certainly not experiencing such extreme conditions," the central bank said.

"This is a marked contrast to the experience in the late 1990s," it added, responding to a Reuters query on whether capital controls — a measure Malaysia employed during the Asian crisis of the late 1990s to staunch capital outflows — were once again an option.

"We are now in a period when the economy has been on a steady growth path with a low level of unemployment for several years," the central bank said. 

Because talk of capital controls dominated Russia's economic rumour mill, this rumour also got people to think how safe their money is in Malaysia.  The depreciating Ringgit isn't helping to quiet the rumor as well.

This statement probably is positive on the Ringgit as nothing has really been said before regarding Malaysia on the possibility of reinstituting capital controls within the last few weeks.   I say the last few weeks because that is when the whole Russian currency fiasco started dominating headlines, then that is when people started to worry.

  But it is sort of a double edged sword.  The conditions she gave are certainly far away from what is happening now, but it is a possibility.  If Malaysia has unemployment reaching 8-9 percent, people may start abandoning the country in droves.  Careful what you say.

We can interpret her statement as we are so far away from capital controls at this point even with the Ringgit at 3.6 to the US dollar.  Markets will like this for sure.

The ringgit outlook and just how bad can it get

Malaysia seems to have received a lot of accolades due to its resilient economy, having recovered  from the asian financial crisis without a bailout from the IMF.

I'm not so sure it's really well deserved, because when we look at the Ringgit, the currency isn't far away from all time lows versus the US dollar.  If you recall the peg rate, it was fixed at RM 3.8 to the US Dollar and we are now at RM 3.53 versus 1 USD.  Perhaps economists have not looked at Malaysia over a long enough time frame.  I'ts been roughly 10 years, surely the Ringgit is worth a lot more now than back in 1997, but according to the markets it's not.

The major problem I can see is confidence.  If most markets are doing well, inevitably international investors will invest in Malaysia, but it won't be a without reservations because at any time, Malaysia can re-instate capital controls.  

Ultimately, the capital controls of 1997 still haunt the country today.  Investment in Malaysia has never been quite the same since then.  In order to purge the stigma of capital controls, the government would need to be controlled by the opposition.

The current ruling coalition will always have investors anxious as they are the ones who instituted capital controls.  But even then, the saying goes "the genie is out of the bottle."  I think even the opposition will consider capital controls if they are desperate.

The Ringgit has two distinctive down trend lines.  It will need to get past these two trend lines with some authority.  It's likely that prices will dither around these levels for at least the next 6 months.  Note that the currency is 1 MYR will buy x amount of USD, hence the small values.

Game Theory at work, US and Europe!

Game Theory, more specifically the Nash equilibrium, Prisoners Dilemma is alive and well in the world. Europe is doing what is best for itself and US is doing what is best for itself. They can both cooperate for better gains but they won't even though it may be in their best interest to do so. (i.e. printing money the way US wants it done)

Apparently US needs help outside of itself to get the economy going again. If Europe won't cooperate with money printing, kiss Geitner's and Bernanke's money printing based solutions goodbye. Of course, they could print even more money, but it is hard to justify buying more assets to debase the currency as there is no crisis. Let's see where Bernanke goes with this.

Anyways, like I said before the US swap lines are open, but the ECB isn't using them. The swaps mean the US gets ECB bonds, Europe gets US Treasuries. ECB in turn, buys crap assets such as sovereign bonds with US money. If the ECB is gone sometime in the future, guess who will own the crap sovereign debts!

Central bankers play follow the bernanke, request liberal use of swaps

From the NY times:

South Korea is proposing that central banks set up a permanent arrangement for foreign-currency swaps to help address the type of funding shortages that emerged during the global financial crisis.

“Broadening and institutionalization” of such measures could help establish “a global financial safety net,” the governor of the Bank of Korea, Kim Choong Soo, says in the text of a speech to be delivered Monday in Seoul at a conference of central bankers.

Mr. Kim’s proposal comes five days before finance chiefs from the Group of 20 nations are scheduled to gather to discuss strengthening efforts to prevent financial crises. The U.S. Federal Reserve chairman, Ben S. Bernanke, who is among the officials scheduled to speak at the meeting, has opposed currency swaps as a “permanent service,” seeking instead to pressure banks into better managing their funding needs across different currencies.

Mr. Kim said his proposal could reduce the need for emerging economies to hold large quantities of foreign-exchange reserves as insurance at a “substantial” economic cost.

Wow, we're talking about Korea suggesting to the US to use more swaps. Well, if they want to bail out Europe, other countries are going to ask for their share as well.

But Bernanke isn't in much of a position since he let the genie out of the bottle with use of swaps during his tenure. Not calling him rascist or anything, but what the hell, exports to Asia are just as much as exports to Europe. If Asia is in trouble, it is in US' company's best interest to bail them out. Asian countries won't need to hold as many reserves which is good for US exports.

US Exports to the world by region

That is the main reason why Europe is getting bailed out. I say Asia should hold one currency together so they don't need to carry as many reserves and dump US dollars so Asia currency and wages can go up.

Then people in Asia can take holidays in Europe and US for Cheap!