Will the ringgit get better? BY M.SHANMUGAM
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Will the ringgit get better? BY M.SHANMUGAM
Saturday, 18 June 2016
BY M.SHANMUGAM
INCREASINGLY, there are schemes “promising” individuals hefty returns from investing in foreign currencies or better known as the foreign exchange (forex) market. For those thinking of putting their money into these schemes, take heed of the dangers.
The forex market is not a place for the ordinary investor to invest in. They have to understand the mechanics, the leveraging elements and the huge downside.
In the forex market, an investor with RM100,000 can leverage the amount invested by 10 or 20 times for investment. If the investor gets it right, then the returns are high. But at the same time, the entire capital can be wiped out if the wrong bets are placed.
The forex market has no underlying asset to it. It is different compared to, say, a property or a fundamentally sound company where there is an underlying asset dictating the value of the investment. The value will eventually emerge over time for the investor to recover the capital.
A seasoned trader in the forex market has this to say for individuals placing their money in forex schemes – “You may as well write a cheque to a charity of your choice, or even donate it as part of the money raised for the next kidnapped victim by the terrorists in southern Phillipines. The reason is because it’s a fool’s game where the market will outwit the investors.”
However, it is not a bad idea to diversify the savings one has, considering that the ringgit has and is still going through a downward cyclical trend in the last three years. More so if they have children studying overseas or are going for a long-awaited holiday.
The objective is NOT to make money from the movements between the ringgit and other currencies in the forex market, but to merely diversify the risk of your savings.
Towards this end, the question that popped up midweek was: would the new method of fixing the exchange rate between the US dollar and the ringgit be better for the ordinary folk?
There is no simple answer to this question.
To understand the dynamics of the latest measure, one needs to understand what determines the exchange rate.
Under the new method, the US dollar versus the ringgit exchange rate would be determined by the total supply and demand for the pair of currencies at 3pm every day.
If the demand for the US dollar is more than for the ringgit, then the ringgit tends to be weak and vice versa.
In the past, the exchange rate was fixed at 11am and was determined based on positions taken by local banks on the strength of the US dollar against the ringgit.
If there were more banks that took a bullish view of the US dollar (meaning taking a long position), the tendency was for the ringgit to weaken. When there was a bearish view of the US dollar (meaning taking a short position), the tendency was for the ringgit to appreciate.
Banks generally take the cue from the offshore ringgit market also known as the non-deliverable forward (NDF) market. The NDF market is settled in US dollars and is generally a leading indicator on the direction of the US dollar against the ringgit.
According to traders, the idea of coming up with a new system to fix the exchange rate is to minimise the influence of the NDF market on the direction of the ringgit.
As what the authorities have stated, the new system to fix the exchange rate would reflect better the fundamentals of the ringgit, as it would be based on the weighted average volume of the currency.
Some analysts have already stated that the new measure would prevent collusion by banks to fix the exchange rate and reduce the volatility of the ringgit.
Then again, there are some seasoned currency traders who doubt that the new system to fix the US dollar versus the ringgit exchange rate would help the domestic currency over the longer term.
There are several reasons for this.
Firstly, it is presumptuous to take the view that the NDF market for the US dollar-ringgit rate is dictating the direction of the exchange rate in Malaysia.
Secondly, and more importantly, the exchange rate between the US dollar and the ringgit is just a number reflecting the fundamentals of the country.
The value of a country’s currency is based on the macroeconomic fundamentals of the country.
It depends on trade flows, foreign direct investments (FDIs) and other services between the host country and other countries. These factors determine the supply and demand for the currency.
For instance, a higher level of FDIs draws higher demand for the ringgit. When there is high demand for our goods and services, the ringgit gets better. When the stock market becomes an attractive destination for the funds, the ringgit tends to get stronger.
Unfortunately, the economic data coming out of Malaysia for the past three years has not been all that good.
The current account balance, which measures the total goods and services traded in the country, dropped significantly to 3% of the gross national income (GNI) last year and is expected to decline further to between 1% and 2% this year.
The current account balance used to be in the surplus of double-digits some 15 years ago.
The capital account, which measures the FDIs and portfolio investments, is expected to be in a negative of 1.2% of the GNI this year. It used to be in positive territory in previous years.
Malaysia is no longer as attractive as it was to attract FDIs. For instance, the FDIs shrunk by 18.5% last year and are expected to see a growth of only 0.2% this year.
Portfolio investments, which is money that goes into the capital markets such as bonds and stocks, were down 38.5% last year, and this year, another 28.2% outflow is expected.
The fundamentals are weakening and this is the reflection of the depreciating ringgit today.
A seasoned currency dealer posed this question on the latest measure.
He felt that the basic question that one should ask is “whether the dog is wagging the tail” or “the tail is wagging the dog?”
Is the movement of the ringgit dictated by the economic fundamentals of the country or the NDF market?
Obviously, it is the economic fundamentals that dictate the day.
Tinkering with the way the exchange rate is fixed would not help improve the ringgit against the US dollar. At most, it could prevent collusion amongst banks to “fix” the rate.
The ringgit, at the end of the day, is determined by the macroeconomic fundamentals of the country, the confidence that the country gives foreign investors, and the amount of goods and services it exports.
The new method of fixing the ringgit will cause some uncertainty in the NDF market in the immediate term. And traders don’t like uncertainty, which only gives them an excuse to close all their positions.
Whether the new system works for the better or worse, we will know in the next few months.
Will the ringgit get better?
BY M.SHANMUGAM
INCREASINGLY, there are schemes “promising” individuals hefty returns from investing in foreign currencies or better known as the foreign exchange (forex) market. For those thinking of putting their money into these schemes, take heed of the dangers.
The forex market is not a place for the ordinary investor to invest in. They have to understand the mechanics, the leveraging elements and the huge downside.
In the forex market, an investor with RM100,000 can leverage the amount invested by 10 or 20 times for investment. If the investor gets it right, then the returns are high. But at the same time, the entire capital can be wiped out if the wrong bets are placed.
The forex market has no underlying asset to it. It is different compared to, say, a property or a fundamentally sound company where there is an underlying asset dictating the value of the investment. The value will eventually emerge over time for the investor to recover the capital.
A seasoned trader in the forex market has this to say for individuals placing their money in forex schemes – “You may as well write a cheque to a charity of your choice, or even donate it as part of the money raised for the next kidnapped victim by the terrorists in southern Phillipines. The reason is because it’s a fool’s game where the market will outwit the investors.”
However, it is not a bad idea to diversify the savings one has, considering that the ringgit has and is still going through a downward cyclical trend in the last three years. More so if they have children studying overseas or are going for a long-awaited holiday.
The objective is NOT to make money from the movements between the ringgit and other currencies in the forex market, but to merely diversify the risk of your savings.
Towards this end, the question that popped up midweek was: would the new method of fixing the exchange rate between the US dollar and the ringgit be better for the ordinary folk?
There is no simple answer to this question.
To understand the dynamics of the latest measure, one needs to understand what determines the exchange rate.
Under the new method, the US dollar versus the ringgit exchange rate would be determined by the total supply and demand for the pair of currencies at 3pm every day.
If the demand for the US dollar is more than for the ringgit, then the ringgit tends to be weak and vice versa.
In the past, the exchange rate was fixed at 11am and was determined based on positions taken by local banks on the strength of the US dollar against the ringgit.
If there were more banks that took a bullish view of the US dollar (meaning taking a long position), the tendency was for the ringgit to weaken. When there was a bearish view of the US dollar (meaning taking a short position), the tendency was for the ringgit to appreciate.
Banks generally take the cue from the offshore ringgit market also known as the non-deliverable forward (NDF) market. The NDF market is settled in US dollars and is generally a leading indicator on the direction of the US dollar against the ringgit.
According to traders, the idea of coming up with a new system to fix the exchange rate is to minimise the influence of the NDF market on the direction of the ringgit.
As what the authorities have stated, the new system to fix the exchange rate would reflect better the fundamentals of the ringgit, as it would be based on the weighted average volume of the currency.
Some analysts have already stated that the new measure would prevent collusion by banks to fix the exchange rate and reduce the volatility of the ringgit.
Then again, there are some seasoned currency traders who doubt that the new system to fix the US dollar versus the ringgit exchange rate would help the domestic currency over the longer term.
There are several reasons for this.
Firstly, it is presumptuous to take the view that the NDF market for the US dollar-ringgit rate is dictating the direction of the exchange rate in Malaysia.
Secondly, and more importantly, the exchange rate between the US dollar and the ringgit is just a number reflecting the fundamentals of the country.
The value of a country’s currency is based on the macroeconomic fundamentals of the country.
It depends on trade flows, foreign direct investments (FDIs) and other services between the host country and other countries. These factors determine the supply and demand for the currency.
For instance, a higher level of FDIs draws higher demand for the ringgit. When there is high demand for our goods and services, the ringgit gets better. When the stock market becomes an attractive destination for the funds, the ringgit tends to get stronger.
Unfortunately, the economic data coming out of Malaysia for the past three years has not been all that good.
The current account balance, which measures the total goods and services traded in the country, dropped significantly to 3% of the gross national income (GNI) last year and is expected to decline further to between 1% and 2% this year.
The current account balance used to be in the surplus of double-digits some 15 years ago.
The capital account, which measures the FDIs and portfolio investments, is expected to be in a negative of 1.2% of the GNI this year. It used to be in positive territory in previous years.
Malaysia is no longer as attractive as it was to attract FDIs. For instance, the FDIs shrunk by 18.5% last year and are expected to see a growth of only 0.2% this year.
Portfolio investments, which is money that goes into the capital markets such as bonds and stocks, were down 38.5% last year, and this year, another 28.2% outflow is expected.
The fundamentals are weakening and this is the reflection of the depreciating ringgit today.
A seasoned currency dealer posed this question on the latest measure.
He felt that the basic question that one should ask is “whether the dog is wagging the tail” or “the tail is wagging the dog?”
Is the movement of the ringgit dictated by the economic fundamentals of the country or the NDF market?
Obviously, it is the economic fundamentals that dictate the day.
Tinkering with the way the exchange rate is fixed would not help improve the ringgit against the US dollar. At most, it could prevent collusion amongst banks to “fix” the rate.
The ringgit, at the end of the day, is determined by the macroeconomic fundamentals of the country, the confidence that the country gives foreign investors, and the amount of goods and services it exports.
The new method of fixing the ringgit will cause some uncertainty in the NDF market in the immediate term. And traders don’t like uncertainty, which only gives them an excuse to close all their positions.
Whether the new system works for the better or worse, we will know in the next few months.
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