SYDNEY: Bank Negara Malaysia (BNM) is estimated to have spent US$12 billion (RM42.4 billion) during September to defend the ringgit, said Moody’s Economy.com.
Moody’s said the ringgit was among Asia-Pacific currencies that had depreciated despite current account surpluses, the others being the Singapore dollar and Philippine peso.
“Sound current accounts may have created a bottom for these currencies and they have ‘only’ depreciated by 5% to 10% since June,” Moody’s Economy.com economist Tine Olsen said in her report yesterday.
She said other currencies in the middle group had fallen because of deleveraging, while those experiencing the biggest depreciation, including South Korea, Indonesia and India, also struggled with current account deficits.
Olsen said Asia-Pacific currency markets had been driven recently by the liquidity squeeze and by current accounts as risk-averse investors moved funds from high-risk markets to safe havens to avoid losses, and also to preserve liquidity.
These include the unwinding of carry trades — the repatriation of funds from high-interest countries to repay loans taken out in low-interest countries.
“As the liquidity crisis eases, investors turn their attention to economic fundamentals to determine the value of national currencies,” Olsen said.
She said the global economic slowdown had encouraged investors to avoid countries with deteriorating current accounts, as they feared export weakness would put downward pressure on currencies.
Olsen said running against the trend of currency markets was the Japanese yen, which is a global reserve currency. The yen has appreciated against the US dollar, but all other major regional currencies have fallen against the US dollar since June.
She said the Australian and New Zealand dollars had been battered in the markets since June, seeing depreciation of 35% and 27%, respectively.
“Monetary policy rates have come down and investors have deleveraged, making the two currencies less attractive than they were earlier.
“At the other end of the scale is the Japanese yen, with an appreciation of 10% due to its status as a safe haven and its role in the carry trade,” she said, adding that as uncertainty increased, investors commonly moved funds out of high-interest countries and paid off their low-interest yen-dominated loans.
Olsen said the forces behind exchange rate movements varied greatly, as were the responses by governments.
“An economic slowdown and looser monetary policy in New Zealand and Australia have reduced the carry trade: borrowing in a low-interest country such as Japan and investing in Australia and New Zealand is no longer as profitable.
“This was amplified by the liquidity squeeze. Interest rates have come down from 7.25% to 6% in Australia and from 8.25% to 6.5% in New Zealand. Investors may have also been discouraged by the current account deficits in these two countries,” she said.
Olsen said if investors began to worry about Australia’s current account deficit, the Australian dollar would be severely challenged in the near term.
She said the Reserve Bank of Australia (RBA) intervened three times in the Aussie market, purchasing the domestic currency two Fridays ago and again last Monday and Tuesday. It has been more than a year since the RBA intervened in currency markets.
Olsen said in Indonesia, by contrast, the central bank was intervening often as it was trying to keep the rupiah steady after the currency reached the psychologically important level of 10,000 rupiah per US dollar.
“With an inflation target of 4% to 5% and annual inflation at 13.6% in July on a year-ago basis, it appears Indonesia has abandoned its inflation target and now focuses on exchange rate stabilisation,” she said.
Olsen said the region’s most troubled currency was the Korean won as doubts about the state of the Korean current account and South Korean importers’ high exposure to the US dollar had prompted traders to stage what at times looked like a run on the currency.
“The government’s repeated assurance that its foreign reserves are healthy has not stopped the exit, and the won has depreciated more than 40% since the end of June.
“The drop appeared to have been halted this week (last week) by a smaller-than-expected current account deficit for September and a currency swap line with the US Federal Reserve. On Thursday, the Korean won jumped 14% as a result,” she said.
Olsen said on a crude scale, the yen’s 10% appreciation matched the depreciation of smaller currencies with no underlying current account problems.
“An exchange rate movement of 10% may therefore be assigned to increased uncertainty and the liquidity squeeze in global markets, and has happened regardless of the sign of the current account.
“How much of the remaining part of exchange rate movements can be assigned to the unwinding of carry trade and worries about the current account is harder to quantify,” she said.
Olsen said the depreciation of Australian and New Zealand currencies was mainly driven by carry-trade reversal, whereas the Korean and Indian currencies had been brought down by speculation about their current accounts.
“As credit markets thaw, currencies may be expected to reverse the 10% move, which was based on the liquidity squeeze.
“Currencies with underlying current account deficits face turbulence in the near future, as a global slowdown puts pressure on the trade balance. Finally, high-interest currencies may be further challenged by looser monetary policy,” she said.
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