Ringgit Ringing in Millions

Introduction

This is also one of my earlier email sharing during the month of April 2010 before I went full swing into blogging: Stronger Ringgit. The reason I am taking a re-look at it because the Ringgit has recently strengthen vs the US Dollar to less than <3.10 due to increasing inflow of USD into our country. Below is the original transcript.

----Start of transcript----

Stronger Ringgit
The strengthening of the ringgit has become a hot topic in recent weeks as most of you all know. A few highlights regarding this:
1. Best performing currency in the region this year, appreciated by 5% against USD. Now at RM3.205.

2. Strong currency is good for our NEM to become a high income nation in 20 years time.

3. Why ringgit so kuat le, makan apa?
a. Expectation of higher interest rates from our Bank Negara due to recovering economy.
b. GDP between 4.5% to 5.5% (conservative estimates), 6% (optimistic).
c. Inflow of funds from foreign sources into MGS (Malaysian government securities aka bonds, I talked about this last sharing).
d. China will sooner than later allow yuan to appreciate (yuan is undervalued). Long story I’ll save it.
 
4. History shows that ringgit follows the yuan and therefore if yuan float (meaning go back to supposed correct value), the ringgit will follow.
 
5. In line with our NEM, we need a stronger currency for sure.
 
6. Estimated to be RM3.10 to RM3.25 for this year, some say it could go as low as RM3.00. Time to rethink your Intel shares.
 
7. Another good thought that if other economies reverse their loose monetary policies (started during financial crisis to boost economy) soon, their currency may take away ringgit’s current advantage. I think RM3.10 is conservative as reported by The Edge, RM3.00 is too low to go not in this year.

----End of transcript----

Ops, I cannot resist posting this up..event babes!

Now What?

In short, the ringgit will continue to strengthen given the fact that the advanced economies are not actually recovering that well as expected. Not only our currency (11%) is strengthening, regional currencies like Japanese Yen (10%), Thai Baht (9%), Sing Dollar (6.4%) and Indonesian Rupiah (5%) have too appreciated against the Greenback (US Dollar) by the bracketed percentage.

The fiscal stimulus by the advanced economies have lost momentum. Fiscal means is the use of government expenditure and revenue collection to influence the economy such as expenditure and taxation. Also their interest rates are at almost zero % which is what they call monetary stimulus in which the monetary authority of a country controls the supply of money, often targeting a rate of interest to attain a set of objectives oriented towards the growth and stability of the economy. In the US, the rate is between 0% to 0.25% and cannot go anymore lower.

Some governments were forced to resort to austerity measures like Greece & UK which is a policy of deficit-cutting, lower spending, and a reduction in the amount of benefits and public services provided. Austerity policies are often used by governments to reduce their deficit spending while sometimes coupled with increases in taxes to pay back creditors to reduce debt.

Thus the only remaining tool to boost their economies is the exchange rate. The feds in the US are mulling over a second QE. Quantitative Easing is sometimes colloquially described as "printing money" although in reality the money is simply created by electronically adding a number to an account. As such the word printing money has dire consequences where an increase in money supply to a system has an inflationary effect by diluting the value of a unit of currency.

Having said that, if the Feds in Nov after meeting up for their next meeting announces another QE, the Greenback could collapse further. Some people are even suggesting around 2.80 or less. Not very good news hey especially if you are holding some US Dollar denominated assets like shares. I have did research before on Intel Corporation if that interests you. If you like shopping now and into 2011 is a good year :)

Bad news over the seas in western countries does not necessarily translate into good news for us in Asia. The truth is that good news is only temporary because the global economy is so intertwined, there is no such thing as total decoupling. The weaker outlook for advanced economies, the more the transmission effects through trade, and through currencies will which affect us here. Take this example:

With more outflow of carry trade currency like the USD (foreign funds holding cash buying Asian equities) into Asian economies will cause appreciation of their respective currencies and most of these countries will resist stronger currencies because it will erode competitiveness and export value. It will hurt the locals if their exports are getting less in value because their currency is strengthening if left unchecked by the government without intervening.

We also see that in some Asian countries there is a build-up of asset bubbles like strong rally on stock exchanges and in rising property prices. These kind of capital movements, excess liquidity made by the "printing of money" and imbalances in financial flow in a global scale will cause another financial crisis. This time the bubble being in Asia.

My Thoughts

That the Ringgit will be around 3.00, at most 2.90 simply because our central bank, BNM will want to control the strength of our currency as we are technically still an export-driven economy. My previous 3.10 no longer holds because recovery in advanced economies are fading. A too strong Ringgit will hurt glove makers, palm oil players and etc and BNM will try to intervene to offset it to a certain extent. It is important to find a balance.

This week's "The Edge" has very good writes up on carry trade currencies, currency wars & global economy. I will recommend this week's edition to anyone. For only RM5, get a copy and just read it. Reading this edition will definitely make you more alert in your investments decisions!

The Week of October 4 - October 10, 2010