Friday, April 11, 2008

Yuan & Ringgit

The Singapore dollar and the Malaysian ringgit gained, while China's yuan strengthened beyond 7 to the dollar. The decision probably stem from the belief that Asian central banks will seek stronger currencies to reduce the cost of importing rice and fuel. The Singapore dollar climbed to a record S$1.3553 per dollar, from $1.377 yesterday, bringing its gain this year to 6.1 percent. The Malaysian ringgit rose 0.8 percent to 3.1532 per dollar and Taiwan's currency gained 0.5 percent to NT$30.298. China's yuan rose as high as 6.9904 per dollar from 7.0017, the strongest since the end of a fixed-exchange rate in July 2005.

The Hong Kong dollar, allowed to trade 5 cents either side of HK$7.8, was little changed at HK$7.7876. Soros who made $1 billion in 1992 by selling the British pound and knocking it out of the European exchange-rate mechanism, the precursor to the euro, said he expects the Hong Kong government to keep the city's currency peg to the dollar. That is where I differ in opinion to Soros. While the HKMA would definitely try with all their might to defend the peg, they will eventually fail. Even as we speak, many HKers are still rushing over to Shenzhen to open yuan currency accounts. How long can you do zero interest rate? The essence of HK's economy has evolved substantially over the last 5 years to be more correlated and dependent on mainland China - how in hell can you have monetary policy being dictated by what happens a few thousand miles away?

China's yuan has accelerated upward in recent months, gaining 4.5% so far this year against the U.S. dollar after pushing 7% higher in 2007. In July 2005, Beijing bowed to economic pressures at home and global calls to loosen its grip on the currency, ending a decade of locking the exchange rate around 8.28 yuan. It took until May 2006 for the yuan to break the barrier of eight to the dollar. While the U.S. has continued to pressure Beijing to allow the yuan to rise, Washington is also concerned that the falling dollar might discourage China from accumulating Treasury bonds at a critical time for the U.S. economy.

An interesting fact which is rarely known is that the China's central bank's first phone call every time they "allow the yuan to move" is not to the Fed or Paulson or even the BOJ. Its to the Bank Negara! As unbelievable as that may sound, this has been shared to me three times by three different economists who have visited China's central bank's top management. Hence no collusion there. That's why I have mentioned a couple of times before that the ringgit will keep in step with the yuan's gains. Now why would the situation be so. Bank Negara is not a big boy by any means. Mind you, this has basically happened following the removal of the ringgit from its debilitating and inappropriate peg of 3.8 to the USD. Even the economists I spoke to could not fathom a plausible reason. Is Zeti so close to the China central bank? My best educated guess would be that Bank Negara has helped Malaysia to accumulate one of the highest foreign reserves per capita, and China's central bank also knows that the yuan and the ringgit are speculated as having the most upside to most currency players. To have some form of cooperation would be healthy. Bottom line, I do expect Zeti's phone to ring a few more times before the year is over. I am looking at 2.90 for the ringgit by year end.

p/s photo: Fala Chen

1 comment:

see said...

Are you serious? this sounds like some conspiracy theory :)

That's Not The Way Share Market Works

Encik Shahril of Sapura Energy had to defend his total take-home package of around RM70m a year for the past few years. Specifically sin...