Fed, Interest Rate Differentials, The De-Dollarisation - What Gives

 

The Federal Reserve finally bit the bullet and hiked rates to a target range of 5.25-5.5%, the highest in 22 years. What does that mean?

Firstly, we are all lucky that there's Jerome Powell, has the political will, intellect, and the balls to do that. If it was a Trump presidency, he would have sacked him and appointed a stooge who would have stopped raising the rate at 4.5% and wouldn't have been "allowed" to raise rates further.

The rate hike saw the bulls for stocks emerge from the ruins as they see this as the final hike necessary. Hope they are right.

The inflationary cycle has to be curtailed this time around because it all stemmed from the over-exuberance printing by the USA when they haven't even rectified the bastardization of US currency since 2008.

All currencies in Southeast Asia depreciated in 2022 and 2023 but to varying degrees. Many Malaysian are concerned over the weakness of the ringgit, in particular, over the last 6 months. 

Local companies have been shouldering higher import costs since H2 2022. Higher import costs will exacerbate existing cost pressures, driven by surging commodity and shipping costs. Firms are seeing a high-cost environment through the rest of 2022. They should find ways to cut costs where possible, for example, by reducing supply chain inefficiencies and reducing channel costs.

Why Asian Currencies Are Weak In 2022 and 2023

Surging commodity prices – Rising commodity prices are causing trade deficits across Southeast Asia to widen, as most of these countries are net commodity importers (except Indonesia). 

Global volatility – Global volatility has triggered a rush of foreign portfolio investment toward safe-haven currencies, leading to massive outflows from the emerging markets of Southeast Asia.

Monetary policy differences – The interest rate differentials as can be seen by the chart below, amplifies the interest rate differentials. Some countries may have a harder time hiking rates alongside the Federal Reserve owing to the already "depressive nature of their local economies".

Have you seen the Japanese yen??!! Even our ringgit is better than the yen. Japan really cannot raise rates as their own domestic economy is so unenergised.

Malaysia tends to feel the effects more because countries like Thailand, Vietnam, and Indonesia have a better than critical mass in their domestic economies. A "critical mass" implies a country's population of more than 50-60m in my view. This is why it is so much harder to launch a startup or a business in Malaysia as it's harder to get to critical mass.

It is more than likely that Malaysia's situation has been exacerbated by large outflows of money since the results of the last election. For reasons I need not elucidate here, it is only logical to expect dubiously gotten gains to leave the country in anticipation of a higher chance of crackdowns on illicit and illegal activities of the past. One should really go through the transactions since the last elections and pinpoint their source of wealth... but do we have the political will, even with a new, more transparent government?

The Demise Of USD Is Near

At every juncture, whenever the US economy goes into a crisis, the smaller countries all get whacked. Everybody's pretty pissed about this. The internet implosion in 2000, the 2008 financial crisis... even the Covid pandemic ... the American solution is to print and print. It goes back to the rest of us while the USD maintains its parity.

But let's solve the inflationary spiral first. Already if you look at the countries that are already doing a de-dollarization campaign. 

China and Russia are trading in their own currencies. Beijing and Brazil have also dropped the dollar in bilateral trade. The UAE is selling China its gas in yuan, through a French company. Southeast Asian nations in ASEAN are de-dollarizing their trade, and promoting local payment systems. Kenya is buying Persian Gulf oil with its own currency. Even the Financial Times newspaper has acknowledged that a “multipolar currency world” is emerging.

For all the central banks' talk that gold is useless... well most central banks have been buying gold in a big way for the past 15 years. China was the biggest since 2008 crisis. Now all the smaller countries have been accumulating as well.

While I do not think the USD will lose its wheels, its reserve currency status will be severely dented over the next few years. Less global transactions will involve USD, where possible.

The biggest Treasury bonds and USD holders will continue to reduce their position in favor of gold holdings. 

For all the talk by central bankers and economists about gold being a poor investment, and not viable as part of a standard global currency system ... these countries sure have been buying a lot of gold. You have to ask, what's that for?

Russia has been among the top buyers of gold in the last ten years pushing its gold reserves from 882.96 tons at the end of 2011 to 2,301.64 tons at the end of 2021. Turkey’s central bank has added around 278.55 tons of gold reserves since 2017. During 2017, 2018, and 2019, Turkey was the second largest purchaser of gold and continued with its buying as the fourth highest buyer in 2020. The country’s gold reserves at the end of 2021 stood at 394.2 tons, equivalent to 24.37% of its total reserves. 

India’s gold reserve levels are the ninth highest in the world. One of the biggest purchases of gold was in 2009 when the Reserve Bank of India purchased 200 metric tons of gold from the International Monetary Fund (IMF), under the IMF’s limited gold sales program. This took its reserves to 537 tons. In the last five years, India has continued to add gold to its reserves, which have swelled its gold holdings from 557.77 tons at the end of 2016 to 754.1 tons at the end of 2021 with 77.45 tons bought alone in 2021. During Q1 2022, India added 6.31 tons, taking its total gold reserve holdings to 760.4 tons. Gold currently constitutes around 6.86% of its total reserves.

China holds the world’s sixth-highest gold reserves at 1,948.31 tons, which constitutes 3.3% of its official reserves. However, many experts believe China's total is closer to 4,000 tons (making it the 4th highest in reality) with a lot of secretive buying - judging by surreptitious transactions over the past few years.

Look at the Gold Reserves, final column... if Gold is so useless why were 3 out of 4 central banks buying so aggressively for the last 5 years? For a no-yield instrument, that's a lot of gold.

The Finale ..

What will happen is the USD will see a gradual devaluation at first, followed by a big one, which they themselves will initiate. Calamity will ensue ... they will all gather around and discuss the global monetary system not working ... in the end the countries with gold will lead the talks as the USA does not have the means to pay down their debt, and even their gold holdings will not make a dent ... those with higher ratios of gold as per net GDP will have a louder voice ... IMF will restructure the SDRs (Special Drawing Rights) which will be a new mixture of gold, and other major currencies as per their ratios of gold to net GDP.