Sunday, April 11, 2010

Ringgit Riding On Yuan's Coattails

To those who pooh-pooh ringgit unofficial ties with the Chinese yuan, the last two weeks have showed that they were dead wrong. Palm oil futures have risen by about 23 percent over the past six months to yesterday as drier-than-usual weather in Malaysia, the second-largest producer after Indonesia, curbed yields. The U.S. dollar got smashed down against the South Korean won, Indonesian rupiah and Taiwan dollar, not to mention the yuan and the ringgit. The Malaysian ringgit, considered a good proxy for the yuan, has risen 4 percent against the dollar in the past two weeks. The Indian rupee has gained 3 percent.

A firmer ringgit yields more benefits to Malaysia than the things we lose out on competitiveness.

The ringgit strengthened 1.8 percent this week to 3.1900 per dollar in Kuala Lumpur, according to data compiled by Bloomberg. It reached 3.1860 yesterday, the strongest level since May 2008. India’s rupee climbed 1.4 percent to 44.2938 and South Korea’s won appreciated 0.7 percent to 1,118.15.

Equity funds focused on developing economies attracted $3.27 billion in the week to April 7, taking net inflows for the year to $10.8 billion, according to Cambridge, Massachusetts- based research firm EPFR Global, which tracks funds with $13 trillion of assets globally. The Asia Dollar index, which monitors the performance of the region’s 10-most active currencies, climbed 0.6 percent this week.

April 7 (Bloomberg) -- China is considering allowing the yuan to trade against the Russian ruble, South Korean won and Malaysian ringgit to promote its use in cross-border trade, an official at the China Foreign Exchange Trade System said.

The People's Bank of China is investigating the possibility of offering new currency pairs, said an official at the Shanghai-based interbank exchange, a subsidiary of the central bank. He asked not to be identified as authorities have yet to make a final decision. Traders now can buy or sell the yuan against the dollar, the euro, the yen, the Hong Kong dollar and the British pound.

China is seeking greater use of its currency to reduce reliance on the U.S. dollar after Premier Wen Jiabao said last month he is “worried” about holdings of assets denominated in the greenback. From July, the government started allowing companies in Shanghai and four cities in the southern province of Guangdong to use yuan in cross-border trade with Hong Kong, Macau and members of the Association of Southeast Asian Nations.

President Barack Obama will keep pressing China to end the yuan’s 21-month-old peg to the dollar and may bring up the topic when he meets Chinese President Hu Jintao next week, spokesman Robert Gibbs said yesterday. Executives at Chinese banks have backed a stronger currency to allow it to play an increased role in global trade and spur growth in financial markets.

China’s currency has been held at around 6.83 to the dollar since July 2008, after appreciating 21 percent in the previous three years. Twelve-month non-deliverable forwards traded at 6.6355 per dollar, reflecting bets the currency will climb 2.9 percent from the spot rate of 6.8254 in the coming year.

U.S. Treasury Secretary Tim Geithner last weekend announced the postponement of the April 15 deadline for an annual foreign-exchange policy review, which may have resulted in China being labeled a currency manipulator. He said meetings over the next three months will be “critical” to bringing policy changes that lead to a more balanced global economy.

“They’re becoming more open to the world, and with that, you’re going to see the currency take on a broader role internationally,” Geithner said in an interview with Bloomberg Television to be aired today. “That’s a healthy, necessary adjustment.”

Expectations that China’s currency will appreciate drove yuan trade settlements to 7 billion yuan ($1 billion) in the first two months of this year, almost twice the 3.6 billion yuan in the second half of 2009, Zhang Yanling, vice chairman of Beijing-based Bank of China Ltd., the nation’s biggest foreign- currency lender, said in a March 19 interview.

“If the yuan is expected to be a strong currency, neighboring countries will prefer to hold the yuan instead of the dollar,” she said.

Since December 2008, China has set up 650 billion yuan worth of swap agreements with Indonesia, Malaysia, South Korea, Hong Kong, Belarus and Argentina, broadening access to the yuan. The central bank has also proposed expanding the use of International Monetary Fund depository receipts in reserves instead of dollars.

“They’re trying to encourage yuan trade settlement, so it would make sense to commit to more trading pairs,” said China chief economist at Royal Bank of Scotland Group Plc. “It would be a natural part of the growing convertibility of the yuan and a step towards widening the use of the yuan. Convertibility of the yuan is a long-term change, but China is taking all the right steps.”

China’s dollar purchases to maintain the currency link have driven currency reserves to $2.4 trillion. Chinese investors held $889 billion of Treasuries in January, the biggest overseas holdings of such debt.

1 comment:

hishamh said...

*cough* correlation does not imply causality *cough*