Wednesday, March 4, 2009

satDnomic Fixed or Float?

The Ringgit is fast approaching the psychological barrier of 3.8000.............. satD's first job after coming back from UK....(this part in black n white -if this was indonesian sinetron)

On my first day at work in the dealing room as a Currency Trader....i was at lost as to what in the world was happening, loud voices shouting prices from a number of "voice boxes" aka your typical computer speakers attached to a dedicated telco line where currency brokers miles away repeatedly updates the market.....each voice belongs to a specific broker linked to a button where the dealer needs to know who is quoting the best bid and best the same time one has to look at the screen for latest news feeds on economic issues and markets in this is multi-tasking your brain at the highest order, split second decision on whether to buy or sell a position requires computation of the events as it is happening and also knowing which hot key button on the telephone console will contact the broker with the best price for execution (i did not know how to use the phone on day one and could not even call my mum to let her know that i was OK)

Anyway folks, from Feb 97 up till June 97 our Ringgit was actually appreciating with a target to go around 2.45 to a dollar….the yen was also appreciating from 145 to 110 yen against USD….this was the trigger point, the Thais are known to have a Huge exposure to cheap Yen borrowing and all of sudden their obligation to the yen loans increased significantly, everybody took the bet, including all our local banks, but we were small players as BNM put an Open Position Limit (How much open exposure one can take against another currency) of up to MYR 50 Million per institutions….

Regionally everybody was on the same bandwagon…It was such a simple bet ..just BUY… nothing to think about anymore( or if the hedge funds buys ..double that just ride the trend), the fundamentals does not support the trend anymore…….So everybody went from one currency to another testing historical resistance on a daily basis from July 97…lets see at what level the Central bankers start to throw their hard earned reserves….anyway all of us knew exactly how much bullets(reserve) they have to start with….BNM went in around 2.5250 for 3 days which was a psychological barrier to the market then….i think we lost around 3 to 4 billion defending that level……direct impact immediately was a squeeze in the Interbank Money Market (MYR Based) sending Overnight Interest rate to 50% from 5% (satD had to be temporarily positioned in the Money Markets team to assist as the dealers there never saw volatility of that magnitude)

Inter-bank money market is the lifeblood of the financial system once participants loses confidence and stop lending the whole system can breakdown in a few weeks….Foreign banks (I’d rather not name them) cut all credit lines to the Local Banks this systematically compounded the liquidity effect and created a 3 tier lending system (Good Local Bank Vs Foreign banks, Foreign Vs Foreign, Local Vs Local)..the Central Banks stepped in daily for months to correct the imbalances, a number of local banks were technically insolvent borrowing from the lender of last resort on a daily basis to meet its obligations….

if i can divert a bit to a case in Hong Kong years before 97, HSBC was facing a run.. all retail depositors were literally taking money out from its branches n putting them into Standard Chartered next door….guess what the folks in SCB did …they pass the money back thru the backdoor to HSBC to ensure that they have enough money to maintain confidence…..that spirit clearly did not exist in 1997 in KL ….all foreign institutions technically stop having any further exposure to local counterparts…..and the local retail depositors (typical herd mentality) began withdrawing the money from local banks n started queuing in foreign banks…they literally had to take a number to deposit money……

Now back to the FX market, our daily turnover then was around 250- 300 Million USD prior to the attack(This is so small compared to the size of financial institutions who were betting against us) …..throughout July 97 to Sept 98 volumes dwindled…markets was so thin….daily bid n offer spreads widen significantly it wasn't to hard to move the market by 1000 basis point…if u wanted to…A number of agents of intervention were roped in namely Petronas, MLNG, Maybank, Bank Bumi….some were selling dollars daily ..n some were lending on behalf on BNM into the market……

I could still remember watching Tun M live in Hong-Kong when he bantai Soros and currency traders in general....first thing I said was Tun ni well informed ke? cause FX positions are typically reported by the local traders (Commercial Banks) to the respective central banks and in Malaysia in particular we have the Form P and Form R for all trades exceeding 50,000 MYR equivalent… simple disclosure of why one need to buy or sell USD against MYR……in this counter parties to the trades will provide basic info ……hedge funds typically trades on leverage with trading lines provided by the counterparty banks hence the names that would appear in our (BNM) disclosure would never ever be hedgefunds. So to point the finger against hedge funds n namely Soros would be just a wild guess without any credible facts....

Currency trading is the largest financial market in the world with close to 3.98 Trillion daily turn-over, most of it is speculative in nature making up to almost 70% to 90% of volumes only a small percentage are actually "international trade’ based..the rest are just bankers and speculators such as hedge fund,etc…the first time these phenomenon came into being was in 1986 when the Daily Average Turn Over Volume of FX Markets exceeds of Collective Volume of Central Bank reserves (refer diagram below-Source McKinsey Dangerous Markets -satD recommends this book to all policy makers in Malaysia, it was written by Consultants who have the actual experience in assisting governments and corporation in various countries affected by the crisis)

Starting from April 98 the policy makers began studying how the market operates from a total view perspective….look at where the leakages are….and put a plug to it….as u all know by now the key measures were - Fix Ringgit, Stop all Offshore Trading of MYR, Stop CLOB…….but the high interest rate n liquidity shortage was too much to handle for our local corporate who borrowed purely with real estate collateral to finance more real estate development…..n some were sneaky enough to slip past proper credit check to provide “inflated speculative shares” as collateral……..hence the creation of Danaharta to relieve the banks of the NPL’s (and this was after BNM reclassified NPL from 6 months to 3 months) and Danamodal to pump in more capital into banks………

Overall i think we did really well with some help from Consultants/Advisors, carefully crafting tactical countermeasures to restore confidence n provide stability to the market. After the counter measures were in, BNM systematically flooded the market with more ringgit by reducing the Statutory Reserve requirement from 12.4% to 4% this money used to be placed in BNM earning 0% is now out into the system… local currency interest rate plummeted and BNM technically had to borrow back the money to ensure a positive real interest rate environment…this was the environment of cheap money which we have been experiencing since 98…n the boom in the bond markets up till a few years back.

Fast Forward (Now in color as per typical sinetron)

The world is now facing a global financial crisis from the eruption of the Sub-prime fiasco originating from North America.

The magnitude of the crisis is still a running number, with an unknown bottom, to a point economist world wide are now questioning the working of the system in which they have been promoting for years. Some are becoming prophet of doom in their view of the evolving situation

In Emerging Europe, a full fledged Currency and Banking Crisis is evolving which will eventually trigger a potential Sovereign Debt Defaults in a some of these countries......this will eventually drive capital fast out of these countries triggering further "flight to quality" back into Dollar Assets. IMF is already in some of these countries and guess what folks they are perscribing CURRENCY CONTROLs as a standard measure

satD asks himself why the fuck does this flight to quality keep going back to where the original problem started...takde benda lain nak invest ke? Reality is that the Dollar remains the world reserve asset and should this status ends that would be the end of America's world power.

On the ringgit front....our Governor have stated that the movement is in line with the regional moves triggered by deleveraging activity and flight to quality

satD now have a few question to ask Madam Governor and DG MI

1. Have you not been lending USD into the local markets way before the recent crisis? and How much money have you spend for smoothing activities in FX Market? read here for more details

2. Do you think Government should consider the option of fixing our currency - as this measure would provide a stability in doing business both domestically and internationally

3. What good does a volatile Ringgit do for the Malaysian Economy in general? And How much money do you want to waste our hard earned reserves for smoothing activities?

Currency speculators smells blood miles away like sharks in the ocean, and the nature of the market itself being the most liquid allows for ease of entry and exit in very large position. How long do you think before they start coming over just to test your ability? They are running out of things to invest globally and currency markets offers the safest most liquid position option.

satD says Fixed the Ringgit before its too late, and we can focus on other things and have greater control on our liquidity environment. Do not add another problem to the mess that we are facing.

Minds are like parachutes; they work best when open. -Lord Thomas Dewer