Friday, August 14, 2015

Anyone claiming to be currency experts are bullshiting!


Central Bank Governor, Tan Sri Zeti Akhtar Aziz appeared at a press conference yesterday to give a statement on many issues.

Most important issue was Bank Negara's position to not peg the ringgit or institute capital control in the light of weakening Malaysian ringgit [read MMO here].

Since ringgit returned to the old peg level of 3.80, there had been much attention to the declining ringgit that the public may not be concerned on 1MDB anymore. This week alone many articles generated in the mainstream and circulating in the social media [read The Star's Currency War on Wednesday].

The  public is talking a lot on the currency market that suddenly everyone is an expert. With many Malaysian blaming the government, Goh Wei Liang wrote a posting with the cynical title Malaysians are now currency experts? in defense.

Goh is still polite because as a former currency trader, we would have told off these instant experts to stop bullshit-ing. And we have seen many.

Nobody can claim expert because no one can say with absolute confidence on what are the determinants of a currency value, let alone a "third currency" or minor currency like ringgit. Having lost RM16 billion, Tan Sri Nor Mohamed Yakcop would be the last to claim as expert.

Presumptous


Malaysians are making a lot of presumptions on the ringgit decline, complaining of higher import affecting business, and claiming the reason being the decline in confidence with the leadership. We will not argue against the last claim.

With Malaysians getting more closed minded and myopic with the growing freedom, it is pointless to tell them that there are two or three more significant variables are in play. Thus the political reasoning could not be single out as THE reason.

The usual factors cited as affecting the conversion of one currency against another currency are differentials in inflation, differentials in interest rate, current account deficit, terms of trade, public debt, and political stability and economic performance [read Investopedia here].

For us traders back then, it is still mere indicators or proxies and not factors with direct impact on the value. 

Currency value is determined by an open informal market of electronic links between banks and brokers, which trades non-stop from the moment it opens Monday morning in New Zealand till it close for the weekend on Friday evening in San Francisco.

In the world of currency trading, 90% of trades are speculative in nature and 5-10% are based on genuine commerce and trade. It is the decision making process of traders that determine currency conversion value and not so much economic data.

Economic data are lagged, usually one to three months behind. It is not current.

The traders in front of computer screen and in the pit wants to know the future economic trend not prehistoric data. They need to make the decision to buy or sell dollar within the allowable exposure limit given to make money for the bank and themselves. Lose money they get the boot.

Most currency traders trade on very short term time span to seize on the market natural vibrations. They could be using charts, wave theory, genetic algorithm, stars and horoscope and even fung shui to determine trend and overbought/oversold condition. These are jobbers that provide liquidity in the market.

They are in and out on the mere profit or stop loss of few pips (1 pip is 0.0001). One moment they are bullish and long on dollar, but in a moment they could go short to a market seen as overbought. Economic numbers are meaningless because they trade based on sentiment and market trend of the day.

Their presence explains the reason our Masters adviser could only achieve a low 65% correlation coefficient in his attempt to make an econometric model of US/Ringgit back then. It implies his model failed to correlate with 35% of the data. Currency market is supposed to be an efficient market. We did warn him to not waste time with the attempt.

Nevertheless, on the other end of the scale, there are traders or investors that trade on major structural economic trends. They ride the trend and not like Nor Yakcop, they do not attempt to influence the market. They are only elite few, even at major financial centres. Most of time, management could not stomach the unrealised lost as they stick it through the market ups and downs.

Ultimately, the basic and direct reason that determine currency value is the order flow. As our Irish Professor in Treasury Management, who was a former trader at Barclays Bank, London described it is the real supply and demand of currency.

However, a glimpse of the information (still indicative) is only available with major trading banks who could see the direction of the flow. It is not known for the majority of other players and definitely not for the armchair commentator like my Masters Adviser.  

Read this 1992 article here in the The Independent of UK for an inside on the life of currency traders.

Ringgit decline

Goh Wei Liang highlighted something the public had wrongly made simplistic presumption. 

All currency in the world are traded as the currency against US dollar. Conversion to other currencies will involve a two trade mechanism of buying US dollar against the original currency and sell that US dollar to get the desired currency.

There is a certain degree of panic among the public as US/dollar ringgit reached the previous peg level of 3.8000 and now as surpass the 4.0000 mark. That is against US dollar but what should matter most is ringgit against other major trading partner.

So Goh pointed out that ringgit weakened against US dollar but strengthened against other currencies.

For the public to be unnecessary panic, he pointed out that unless one is dependent to the US dollar and it plays an important role in their daily transactions, the panic is unnecessary. 
 
Quite a number of Malaysians are panicking to the point of calling for ringgit to be peg and a capital control policy put in place.


Rocky quoted Dato Abdul Wahid Omar here to highlight that the situation now is far different than in 1998 [read here] to warrant such measures. 

The ringgit decline is not catastrophic in nature and there is no concerted currency attack in play. Ringgit is declining against US dollar simply because the US dollar is bullish and US interest rate is expected to rise.

There will come a point in the usual cycle that US interest rate rise turn counter productive to their economy and indirectly the US dollar, so why panic?

The ringgit decline is also compounded further by the devaluation on the Yuan. That is unexpected and catastrophic in nature but still part and parcel of market.

Ringgit decline will affect importers thus the probable reason many Malaysians are complaining. They are too dependent on foreign goods and parts.

Is that the government's fault?

The decline in ringgit is not a new phenomenon. It has been happening for more than a year. Sometime last year there was complain that ringgit is too strong and our exports are out-priced.

The market talk is that the decline was started by capital flights by Malaysian billionaires. Public only realised when The Edge's Dato Tong Kooi Ong was accused of plotting to weaken the ringgit as part of a grandplan to topple the government. A story line which emulate the reformasi days of 1998-2000.

In Goh's latest posting here, he explores the relationship between commodity prices with ringgit as he claim ringgit begin to weaken as far back as 2010/11 when commodity begin to decline.

It is a good read but as we said earlier, it is an explanation of the past to soothe the panicking Malaysians. Again, it is not government fault and no need to intervene since the movement is not a panic run.

For traders, who have direct hand in determining the ringgit value, economic means nothing. They are only on the lookout for a certain major economic figure. Sometimes the most recent numbers create no impact if it is widely expected and market have built-in the expectation like current happening on the US dollar. 

Trading on expectation is similar to stock traders trading on future EPS. So economics was only useful material for traders material to ya ya and bullshit the business reporters.

Most major banks are too busy and hardly bother to entertain them, so only small insignificant banks get quoted by business news. Traders hardly read report in the paper.

The economic numbers is only meaningful but if it is some unexpected numbers not announced yet, then we are talking ...

8 comments:

amir zahini Sahrim said...

Are we under attack?

Seems like 1998 is copycatting itself again.

Hope some genius blokes takes care of it and calm the people."run on the banks" and "baron de rothschild" motto are not to be taken as oppurtunity to the rich and famous.

Bless this land with morality,sanity and above all accuracy to by past this dogmatic incidents.

Anonymous said...

Bro,
most of the daily thing we use, wear or eat are traded in USD. worst is oil can only be traded in USD.. so brace for the storm coming in our way soon....

Anonymous said...

Bro, how do you explain this- If compared to 14 Aug 2014, RM dropped by 22% to 1USD. SGD dropped 11% IRR 8.1% and GBP 7.8%.

Anonymous said...
This comment has been removed by a blog administrator.
hasan said...

The questions that are circulating in my mind: (1) Is the ringgit under attack by speculative currency operations; (2) The collapsing oil price – is it a deliberate US operations? If it were then everybody would be affected. (3) Are there any saboteurs, internal and/or external, to destabilize our economy and the government? If it is so, thus, for as long as PM Najib is in power, our economy/currency will continue to remain weak and fragile and susceptible to political and economic warfare. PM Najib must get rid of these saboteurs then.

Be it as it may, my rousing worry is what if the oil prices fall to USD10.0. And what if the currencies around the world collapsed? The economic and political situation could well spin out of control not just for our country but perhaps for other countries as well. Could we put all the blame on PM Najib’s shoulders then?

What is important now, should we continue defending the ringgit? But what will be the end result? Or should we disconnect or unlink or economy from the dollar-dominated liberal western economy and use our reserve funds to invest/finance various strategic domestic infrastructure projects that will considerably strengthen our economy? Just a gentle reminder – in Islam any sabotage operation and speculative operation is haram.

Sir Wenger said...

Dear AOB,
As a former currency trader, would you agree with Sdr Goh's assertion that the Rouble has lost 114% of its value?

I mean this guy does not even know the difference between a direct quote and an indirect quote and your praising his article. This is basic stuff, and if you get this wrong then maybe there is a risk that this guy does not know what he is talking about.

Still, a good day to you, sir.

Sir Wenger said...

AOB,
And on a second note, you are also wrong that people cannot predict currencies on a broad macro trend.

Relate an event I attended last year together with other fund managers.

A very well renowned economist, who used to appear in CNBC in 1998, was the key talker. His message
1. US Dollar will strengthen
2. China may be forced to devalue its yuan.
3. Euro will weaken

*PS: He was actually praising ETP, GTP and all that sort of stuff.

All spot on.

Think he was a genius? I turned and asked a lady from JP Morgan - "what do you think?"

She answered - "Nothing new, consensus opinion."

A Voice said...

9:37

Sorry have to delete you. This is not a political posting.

For other commentators not released, you guys may have missed out on the condition to get comments released. No hostilities, insults and bad languages, especially to the blog owner.

Can't you guys just state your opinion without giving those uncultured remarks.

Amir

So you think we are under attack?

7:26 PM

Off course, and you are likely to say we cannot ignore the rise in dollar.

Shouldn't importers prepare for that eventuality.

Don't expect a Monetarist Governor to intervene just so that importers will be happy. When they make money money they keep quiet.

Lets just trust businessmen to find the ways and means to sort their affair. For the consuming public, serve them right for not applying their purchasing "power" well and make traders on their toe.

8:30 PM

I think you can google for the answer. It is not the intention of this posting to be centre for Q&A on forex.

Hasan

There is lots of ifs in your view. Nevertheless, you are entitle to it.

Wenger

I quote Goh for his general message. You can dissect and comment in his blog to highlight any mistake.

I've traded at a major financial centre. Such prediction seminar is a daily affair. There are many. You can get newsletters from investment advisers, in house research, and others.

After having gone to many such seminars, I seldom find myself confuses. Believe me there will be those that predict US dollar not going anywhere or down. Anyway everyone is an expert on the hindsight.

Ponder this ...

If they had predicted those trend, did they put their money where their mouth is?

Are they doing it to sell their services - broking, fund mgmt, books and seminars, training program ...? Why are they going for the breadcrumbs when they can go for the whole bread????

Sometimes there are those that do seminar to get others to join the bandwagon and help them get out of a sour position. Soros is reknown in talking the market to suit into his position.

It's one thing to talk but taking a position is something else.

Reminds me of few former colleagues who could come up with fantastic analysis and discover useful information. But they could hang out all day just watching the screeen second guessing themselves on the timing.

Ya ya only!!!

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