Devaluation of S$ as possible Monetary Tool?

[londontrader]

A 20% lower band merely translates to a rate of S$1.83 to 1 USD.
Its is within acceptable range as we have visited this level during
the Asian Currency Crisis.

Dear Conan,

I think you misunderstood the point I was making.

1. I offered no opinion about any acceptable level or range for USDSGD. It may very well reach 1.83 (as you suggested) over time due to changes in the currencies within the trade weighted basket.

2. My point was that the MAS will not deliberately engineer a sudden adjustment of USDSGD from 1.52 to 1.83 (ie. a 20% devaluation) because of all the reasons I outlined.

3. Between mid 1997 and early 1998 (Asian Crisis), the SGD did depreciate by about 20% against the USD amid very high volatility. Note that this was not deliberately engineered by the MAS.

Hope that clarifies matters

cheers

 

[Conan the Barbarian]

Thanks for the clarification.
I do agree with you that MAS will not engineer a
sharp devaluation. More like the market forces
will cause it be lower as other economies allow
theirs to slide.

 

[Hope]

Dear Hope,

Just a few comments:

1. The GIC situation is not as clear as you imply. Did they really lose 41% (ie. lim hwee hua's slip in parliament)? If so, 41% of what? Is it $100bn, $300bn or $500bn (all estimates that have emerged over the years)? What about the alternative report by Dow Jones that GIC lost $50bn? When the level of disclosure is ZERO, all we have is speculation.

2. It is useful to define what actually constitutes the RESERVES available to Singapore:

a. There is the Official Foreign Reserves (OFR) managed by the MAS which totals slightly over US$167bn at the end of Jan 2009. The size of the OFR is an important indicator of Singapore's financial standing and provides the
MAS the capacity to intervene in the FX market in support of the SGD.

b. There are the reserves (let's call them Excess Foreign Reserves) managed by GIC and Temasek. The Temasek figure is US$127bn at the end of Nov 2008 and the GIC figure is kept secret but thought to be well in excess of US$300bn.

3. If you monitor the evolution of the OFR over time, the current level is more than sufficient to provide confidence in the SGD, even with a supposed 41% loss in GIC's assets. That explains the absence of a speculative attack on the SGD after Temasek's large loss was confirmed and GIC's loss was implied.

4. I do agree with you that USDSGD is heading up in the medium term (ie. SGD depreciating). But this has little to do with the losses in GIC and Temasek. It has a lot to do with the increasingly more accommodative MAS stance and the movements within the trade weighted basket of currencies.

Hope this provides some clarification

cheers

Obviously you do not fiollow GIC repost as closely as you should

It was on 154th,2 Feb 2009,p.A4

Tony Tah said in Davos that GIC had portfolio value of US$300 billion(S$450 billion)

 

[Hope]

Obviously you do not fiollow GIC repost as closely as you should

It was on 154th,2 Feb 2009,p.A4

Tony Tah said in Davos that GIC had portfolio value of US$300 billion(S$450 billion)

It is stated in GIC mission statement that GIC's function was to manage the foreign reserve of Singapore.

Temasek is an investment c\vehicle to manage the government investment,such as GLC,real estates,etc.

Although we do not know the actual composition of GIC portfolio,I cant agree with you that the loss of our foreign reserve has nothing to do with our foreign exchange,that is against all princiaps of foreign exchange.

Also,may I point out that the foreign reserve of Singapore is vastly different from the foreign reserve of oil porducing countries,such as Saudi,Russia,Kuwait,etc ,which earn the foreign money by selling what they dig from the ground,rather,it is similair to Chimna where huge FDI and trade surplus made up the two componenets of foreign reserve.IN the case of PRC,about US$80 billion pf FDI per year.

BTW,Gonh Meng Seng cant be talking about a devaluation of 20%,but the stance would be a deliverate,market driven downwards movement to US$1=S$2.00 by year end,we shall see.

As we know,PAP has never allowed S$ to be internationalise,otherwise S$ would be under direct attach by hedge fund,I am sure,with the current situation.

 

[londontrader]

Dear Hope

My response to your comments:

<< Obviously you do not fiollow GIC repost as closely as you should >>

I've been in the business for many years and had a hand in managing a small piece of the GIC pie as part of an external management team. So, I actually keep track of GIC's activities very closely.

<< It was on 154th,2 Feb 2009,p.A4

Tony Tah said in Davos that GIC had portfolio value of US$300 billion(S$450 billion) >>

The ST didn't quote Dr Tony Tan explicitly confirming an estimated portfolio value of US$300 bn at any point in time. The reference to the US$300 bn was made by the ST editors. You should note what Dr Tan actually said ie. look out for the quotations! I reproduce the article below:

------------------------------------------------------------------------
Straits Times
2 Feb 2009

DAVOS: The Government of Singapore Investment Corporation (GIC) is confident that it will be able to continue generating reasonable returns for the country's reserves despite a tougher global investment climate.
But the investment manager must continue to manage its investments carefully and cautiously, diversify its portfolio intelligently and manage risks well, said its deputy chairman and executive director Tony Tan.

Dr Tan told The Straits Times that GIC will be able to deliver the sustainable investment returns which will enable the Government to 'prudently draw on Singapore's reserves for budgetary purposes over the long term'.

He said on the sidelines of the World Economic Forum in Davos last Friday: 'This is the best contribution that GIC can make towards ensuring that Singapore continues to progress and prosper.'

Elaborating on GIC's key strengths, he cited three factors that give GIC the edge amid the increased market volatility and financial turmoil.

The first is a long-term investment horizon of '20 years or more', which allows GIC, with an estimated portfolio of US$300 billion (S$450 billion), to ride out fluctuations in the value of its investments over several economic and market cycles.

Dr Tan added that this has become very important since it is the long-term expected real return of the Government's portfolio which will determine how much the Government can draw on reserves.

The Government recently revised the Constitution to enable it to draw on more of the returns from investing its reserves.

The second strength of GIC is its diversified portfolio, which includes many asset classes from equities and bonds to real estate, private equity and commodities.

GIC invests in both the developed markets of the United States and Europe, as well as developing markets in Asia and other parts of the world.

Dr Tan said: 'This diversified portfolio as reflected in GIC's asset allocation strategy enables GIC to work towards a better optimal balance between risk and reward.'

He reiterated GIC's investment aim, which is to ensure minimal losses rather than trying for maximum returns. 'Our philosophy is to look after the downside, and the upside will look after itself.'

Finally, GIC has built up a 'deep pool of expertise' in its staff, who are able to operate in many countries and markets.

Elsewhere in the 30-minute interview, Dr Tan noted the positive feedback the recent Singapore Budget received from business leaders in Davos, and revealed that GIC's cash position has increased.

He also noted that top bankers and heads of large corporations he met were 'very impressed' with the Budget.

They said it reflected a plan not only to weather the present recession, but also one to help Singapore emerge as a stronger, more resilient nation in the future. And all this without the need to borrow.

'This is the vital difference which sets Singapore apart from all the other countries I've talked to. It's the one thing which impressed bankers and businessmen,' he said.

Dr Tan also revealed that GIC's cash reserves have risen above 7 per cent of its portfolio in the second half of last year, having cut back on exposure to equities since mid-2007. He said its current portfolio is 'underweighted in equities, overweighted in cash and cash equivalents'.

Asked about the general sentiment of delegates regarding the crisis, he said: 'Everybody's worried. This is the most serious economic and financial crisis the world has seen in the last 50 years...nobody knows how long the recession is going to last.'

But he said that if the recent slew of fiscal and monetary measures work, recovery could come later this year with the end of recession by 2010.
--------------------------------------------------------------------------

You should also read Dr Tan's actual remarks at Davos:

http://www.gic.com.sg/PDF/press_300109.pdf

There is no reference to any confirmation of a US$300 bn portfolio value!
You should be more discriminating when reading anything published by the Straits Times!

Regards

 

[Goh Meng Seng]

Dear GMS,

Talk of SGD depreciation has been circulating around trading floors since 2008. Many of us are wondering why the MAS is still on a NEUTRAL stance with inflation looking very much like last year's war. The general consensus is that MAS will FINALLY move towards an ACCOMMODATIVE stance at their April Policy Review. Some are predicting that MAS will re-center the SGD band. All of us have heard this rumour that the SGD will devalue by 20-30% very soon. If you pull up a current USDSGD chart, you will realise that no serious FX professional actually believes this will happen.

Why is a 20-30% devaluation such a bad idea?

1. It will trigger successive rounds of "beggar thy neighbour" devaluations. This actually happened in the aftermath of the Great Depression because nations believed that one could devalue your way out of trouble. In the end, everyone just became poorer!

2. Singapore's exports have a very high import content (something like 60%). This will negate the initial positive impact of a weaker exchange rate.

3. It will be inflationary even with falling raw material prices. This inflation will cause massive asset destruction (remember your CPF savings denominated in SGD).

4. What is really important for Singapore's trade competitveness over time is the stability of SGD ie. confidence in our currency.

5. Singapore is a major financial centre. Any hint of such a devaluation (from a credible source) will trigger massive capital flight!

6. A steep SGD depreciation will sharply erode the purchasing power of wages. This leads to a wage price spiral as workers push for higher nominal wages in order to compensate this loss in real value.

7. It is for these reasons that MAS doesn't use the exchange rate as an instrument to promote export competitiveness. The SGD is managed in order to maintain low inflation and exchange rate stability.

8. So what about our export competitiveness?

The govt prefers to use direct measures to reduce our real exchange rate ie. supply-side policies. These policies aim to reduce business costs, improve labour productivity and enhance capabilities ie. sounds like the recent budget measures right?

In Conclusion

My belief is that MAS will move to an Accommodative stance in April, which will be in line with lower inflation expectations. This should allow for a gradual and modest depreciation of the SGD.

Alternatively, MAS could re-centre the SGD band (Not by 20-30%!!!) lower and keep the zero appreciation path.

My 2 cents worth
cheers

Dear Londontrader,

Are you really a trader in London? If not, maybe you could consider running for elections in Singapore!

The rumor has been there for months and recently, a long time school mate visited me and we were talking about it.

The rational provided was:

1) The deflationary pressure on commodity prices as well as oil may just off set the inflationary pressure caused by such a depreciation move.

2) Most MNCs or foreign investors have their earning in US $ via trade while paying wages in Singapore dollars. Thus, it may not affect MNCs' confidence because they import raw materials using US$, paying wages in Singapore dollars and export the finished products in US$. Thus capital flight will be limited while cost of production decrease, implying export prices will be reduced.

3) According to the I/O (Input/Output) table researched by some NUS don, the local inputs in export may be higher in percentage than previously thought. This is mainly due to past appreciation of S$ as well as increase in rental, indirect taxes and local wages. Thus a depreciation would actually help to lower export prices, making it more attractive to Foreign investors.

4) A depreciation of S$ would naturally mean lower wages for Foreign workers in relative terms to their home countries' currencies. It would mean a downward adjustment of supply of Foreign workers or that translate into higher cost of employing Foreign Workers when Singapore's wages become less attractive. The past appreciation of S$ is part of the reason why foreigners wanted to come and work in Singapore.

5) MAS might have not used forex as a monetary tool in the past but it seems that with the pressure of drastic cut in export as well as local pressure on foreign workers displacing local workers, this may become a weapon of last resort.

6) While you are right that a drastic depreciation may cause knee jerk panicky reaction on foreign investors of hot money, but it would be even damaging if there is a gradual movement of opaque policy adjustment which will cause more speculative attacks. It means that if MAS announced 20% depreciation and promise to keep it at that, the shock may only occur in a short time frame and confidence of MAS effort in maintaining that level would be restored, in view of the amount of Forex reserves that MAS has. But if there are signs of gradual depreciation without any announcement, speculation may be built up and eventually snowballed and speculative attacks may actually worsen the situation.

7) It seems to me that MAS has started to sell S$ in the currency market recently, thus resulting in the recent depreciation of S$.

8) You are right in the sense that such depreciation effort may be negated by regional or even global reactions in using the same mindset.

9) In my view, it is not easy to devalue S$ in view of the large amount of money that US is printing right now. Even maintaining at the current exchange rate would require MAS to print and sell lots of S$. In order to devalue against US$, it would mean a DOUBLE selling of S$ if MAS wants to achieve the desired level of forex depreciation.

10) I do however agree with you that MAS may just announce a re-centering of the band. But how could it provide a credible forex intervention to achieve that level is something yet to be seen.

11) There are a lot of other implications to the lives of Singaporeans. It would actually mean a defacto wage reduction for workers with respect to their purchasing power. But such wage reduction does not help local companies, only help those MNCs who have more external exposures. And yes, it may create a stagflation locally if the effect of depreciation does not really help to increase growth.

It is always nice to hear your views on economic and finance matters.

Goh Meng Seng

 

[londontrader]

Dear Hope

More responses:

<< It is stated in GIC mission statement that GIC's function was to manage the foreign reserve of Singapore >>

Yes, and Singapore's Foreign Reserves consist of:

a. The OFR managed by the MAS - the primary fund used to manage the exchange rate and shore up confidence in the SGD. FYI, the OFR consists of Singapore's IMF Reserve, SDRs & holdings of foreign currencies + Gold. It is not a portfolio of stocks etc...

b. A large chunk of "Excess Foreign Reserves" - This is the amount over and above what is required in the OFR in order to support the SGD. GIC was set up because Dr Goh Kheng Swee (and others) felt that Singapore should seek better long term returns for these excess reserves. The fact that this $ exists (but is not disclosed) also lends indirect confidence to the SGD.

<< Temasek is an investment c\vehicle to manage the government investment,such as GLC,real estates,etc. >>

Temasek acts like a strategic investor for the Singapore govt. This means that they take larger stakes than normal fund managers and are subject to more risk. That should explain the higher long term returns compared to GIC's (suppose to be less risky).

Temasek's $$$$ comes from the same source as GIC's ie. Temasek also has a cut of the excess reserves that I mentioned (a smaller cut of course).

<< Although we do not know the actual composition of GIC portfolio,I cant agree with you that the loss of our foreign reserve has nothing to do with our foreign exchange,that is against all princiaps of foreign exchange. >>

If they announced that the OFR has shrunk in value by 41% overnight, I am very confident that you will witness a speculative attack on the SGD.

It is widely acknowledged in the FX mkt that Singapore's SWFs have taken a serious hit over 2008. However, you haven't witnessed an attack on the SGD have you??? This is because the amount that currently resides in the OFR is more than sufficient to inspire confidence in the SGD. I hope that provides some clarity for you.

<< Also,may I point out that the foreign reserve of Singapore is vastly different from the foreign reserve of oil porducing countries,such as Saudi,Russia,Kuwait,etc ,which earn the foreign money by selling what they dig from the ground,rather,it is similair to Chimna where huge FDI and trade surplus made up the two componenets of foreign reserve.IN the case of PRC,about US$80 billion pf FDI per year. >>

Yes I agree
Would also point out that the PRC has decided to follow Singapore's example of actively managing it's Excess Foreign Reserves in order to seek some capital gains.

<< BTW,Gonh Meng Seng cant be talking about a devaluation of 20%,but the stance would be a deliverate,market driven downwards movement to US$1=S$2.00 by year end,we shall see. >>

A currency devaluation IS a deliberate one off move by the central bank (or relevant govt agency). That's what GMS was referring to.

What you seem to be talking about is a gradually depreciating SGD due to:

a. A more accommodating MAS policy stance (DELIBERATE part)

b. Changes within the currencies that make up the trade weighted basket used to peg the SGD (MARKET DRIVEN part). The largest component is the USD ie. that's why we have seem some SGD depreciation already. USD has found some recent strength because of swings in risk appetite.

I actually agree with your deliberate + market driven depreciation scenario, but not necessarily with your forecast of USDSGD = 2 by year end.

<< As we know,PAP has never allowed S$ to be internationalise >>

Actually they have!
Why do you think they started to allow foreign banks to run SGD denominated accounts!

They wanted to be a major financial centre and a global wealth management hub. You can't have tight ass control over SGD together with these objectives. This started to happen during the recovery from the Asian Crisis. That's why Mr Koh Beng Seng (remember him???) left the top management of the MAS. Mkt talk was that he didn't agree with the new policy.

<< otherwise S$ would be under direct attach by hedge fund,I am sure,with the current situation.[/QUOTE]>>

The SGD won't come under speculative attack unless the govt seriously screws up the economy. On top of that, The size of the OFR is a great wall to climb for any would be attacker. We also have the excess reserves in GIC and Temasek (less liquid assets of course) that will come into play should any hedge funds attempt any monkey business.

That's why the PAP is comfortable with allowing GIC and Temasek to lose US$50 bn once in a while. They know that there is enough in the OFR to handle any band of currency speculators.

Cheers

 

[UpYoz_olo]

Dear Hope

More responses:

<< It is stated in GIC mission statement that GIC's function was to manage the foreign reserve of Singapore >>

Yes, and Singapore's Foreign Reserves consist of:

a. The OFR managed by the MAS - the primary fund used to manage the exchange rate and shore up confidence in the SGD. FYI, the OFR consists of Singapore's IMF Reserve, SDRs & holdings of foreign currencies + Gold. It is not a portfolio of stocks etc...

b. A large chunk of "Excess Foreign Reserves" - This is the amount over and above what is required in the OFR in order to support the SGD. GIC was set up because Dr Goh Kheng Swee (and others) felt that Singapore should seek better long term returns for these excess reserves. The fact that this $ exists (but is not disclosed) also lends indirect confidence to the SGD.

<< Temasek is an investment c\vehicle to manage the government investment,such as GLC,real estates,etc. >>

Temasek acts like a strategic investor for the Singapore govt. This means that they take larger stakes than normal fund managers and are subject to more risk. That should explain the higher long term returns compared to GIC's (suppose to be less risky).

Temasek's $$$$ comes from the same source as GIC's ie. Temasek also has a cut of the excess reserves that I mentioned (a smaller cut of course).

<< Although we do not know the actual composition of GIC portfolio,I cant agree with you that the loss of our foreign reserve has nothing to do with our foreign exchange,that is against all princiaps of foreign exchange. >>

If they announced that the OFR has shrunk in value by 41% overnight, I am very confident that you will witness a speculative attack on the SGD.

It is widely acknowledged in the FX mkt that Singapore's SWFs have taken a serious hit over 2008. However, you haven't witnessed an attack on the SGD have you??? This is because the amount that currently resides in the OFR is more than sufficient to inspire confidence in the SGD. I hope that provides some clarity for you.

<< Also,may I point out that the foreign reserve of Singapore is vastly different from the foreign reserve of oil porducing countries,such as Saudi,Russia,Kuwait,etc ,which earn the foreign money by selling what they dig from the ground,rather,it is similair to Chimna where huge FDI and trade surplus made up the two componenets of foreign reserve.IN the case of PRC,about US$80 billion pf FDI per year. >>

Yes I agree
Would also point out that the PRC has decided to follow Singapore's example of actively managing it's Excess Foreign Reserves in order to seek some capital gains.

<< BTW,Gonh Meng Seng cant be talking about a devaluation of 20%,but the stance would be a deliverate,market driven downwards movement to US$1=S$2.00 by year end,we shall see. >>

A currency devaluation IS a deliberate one off move by the central bank (or relevant govt agency). That's what GMS was referring to.

What you seem to be talking about is a gradually depreciating SGD due to:

a. A more accommodating MAS policy stance (DELIBERATE part)

b. Changes within the currencies that make up the trade weighted basket used to peg the SGD (MARKET DRIVEN part). The largest component is the USD ie. that's why we have seem some SGD depreciation already. USD has found some recent strength because of swings in risk appetite.

I actually agree with your deliberate + market driven depreciation scenario, but not necessarily with your forecast of USDSGD = 2 by year end.

<< As we know,PAP has never allowed S$ to be internationalise >>

Actually they have!
Why do you think they started to allow foreign banks to run SGD denominated accounts!

They wanted to be a major financial centre and a global wealth management hub. You can't have tight ass control over SGD together with these objectives. This started to happen during the recovery from the Asian Crisis. That's why Mr Koh Beng Seng (remember him???) left the top management of the MAS. Mkt talk was that he didn't agree with the new policy.

<< otherwise S$ would be under direct attach by hedge fund,I am sure,with the current situation.

>>

The SGD won't come under speculative attack unless the govt seriously screws up the economy. On top of that, The size of the OFR is a great wall to climb for any would be attacker. We also have the excess reserves in GIC and Temasek (less liquid assets of course) that will come into play should any hedge funds attempt any monkey business.

That's why the PAP is comfortable with allowing GIC and Temasek to lose US$50 bn once in a while. They know that there is enough in the OFR to handle any band of currency speculators.

Cheers[/QUOTE]

One other reason why SGD is impervious to speculator's attention is the coupling with the Brunei dollar. Hence, SGD is also deemed partial petro dollar. If ever the Brunei sultan starts making his displeasures of Sg known, I'll be the first to exchange all my available SGD for anything else, OFR notwithstanding.

Hence, we can conclude the thread starter has a tendency to parrot hearsays, with almost no originality to be expected. Good thing he qualified the claims as hearsay from the outset.

Therefore, that deserves another round of:

:oIo::oIo::oIo::oIo::oIo::oIo::oIo::oIo::oIo::oIo:

 

[dysentry]

problem is US government is dumping trillions into their money supply, the USD has no legs...

 

[Goh Meng Seng]

>>

The SGD won't come under speculative attack unless the govt seriously screws up the economy. On top of that, The size of the OFR is a great wall to climb for any would be attacker. We also have the excess reserves in GIC and Temasek (less liquid assets of course) that will come into play should any hedge funds attempt any monkey business.

That's why the PAP is comfortable with allowing GIC and Temasek to lose US$50 bn once in a while. They know that there is enough in the OFR to handle any band of currency speculators.

Cheers

One other reason why SGD is impervious to speculator's attention is the coupling with the Brunei dollar. Hence, SGD is also deemed partial petro dollar. If ever the Brunei sultan starts making his displeasures of Sg known, I'll be the first to exchange all my available SGD for anything else, OFR notwithstanding.

Hence, we can conclude the thread starter has a tendency to parrot hearsays, with almost no originality to be expected. Good thing he qualified the claims as hearsay from the outset.

Therefore, that deserves another round of:

:oIo::oIo::oIo::oIo::oIo::oIo::oIo::oIo::oIo::oIo:[/QUOTE]

Hearsay or not, it does not really matter but the truth is, despite an astronomical amount of money being thrown in by the US government, S$ is depreciating gradually over the last few weeks. Have you wonder why?

It could only mean two things. MAS is selling S$ in massive moves. This is in relative to the amount of US$ being injected into the system, MAS would have to sell S$ in order to sustain whatever band or peg they have determined, else they would have ended up like Japanese Yuan, appreciating against the Greenback even when its export was badly hurt.

So to effect a depreciation at this moment for S$, it would mean that either there are lots of private sellers of S$, which I really doubt so, or that MAS is selling off S$. It may be more than speculation that MAS has the real intention to depreciate S$; i.e. IT IS REAL that MAS is making efforts to depreciate S$, whether via a gradual effort or an open straight statement.

Goh Meng Seng

 

[UpYoz_olo]

One other reason why SGD is impervious to speculator's attention is the coupling with the Brunei dollar. Hence, SGD is also deemed partial petro dollar. If ever the Brunei sultan starts making his displeasures of Sg known, I'll be the first to exchange all my available SGD for anything else, OFR notwithstanding.

Hence, we can conclude the thread starter has a tendency to parrot hearsays, with almost no originality to be expected. Good thing he qualified the claims as hearsay from the outset.

Therefore, that deserves another round of:

:oIo::oIo::oIo::oIo::oIo::oIo::oIo::oIo::oIo::oIo:

Hearsay or not, it does not really matter but the truth is, despite an astronomical amount of money being thrown in by the US government, S$ is depreciating gradually over the last few weeks. Have you wonder why?

It could only mean two things. MAS is selling S$ in massive moves. This is in relative to the amount of US$ being injected into the system, MAS would have to sell S$ in order to sustain whatever band or peg they have determined, else they would have ended up like Japanese Yuan, appreciating against the Greenback even when its export was badly hurt.

So to effect a depreciation at this moment for S$, it would mean that either there are lots of private sellers of S$, which I really doubt so, or that MAS is selling off S$. It may be more than speculation that MAS has the real intention to depreciate S$; i.e. IT IS REAL that MAS is making efforts to depreciate S$, whether via a gradual effort or an open straight statement.

Goh Meng Seng[/QUOTE]

Really Mr Goh, with due respect, I'm not quite interested to debate you, at least until you prove to be less of a parrot. The USD has been appreciating against all currencies bar gold and the YEN the past few months. Where have you been??? What do you want of the SGD? Same strength as the USD or higher still?? Does it make economic sense for Sg to have a strong dollar viz-a-viz the rest of the currencies? No wonder your team fared 'so well' last time.

 

[lockeliberal]

Dear GMS

Honestly movements within a band should not concern anyone but professional traders like London. The historical peak and through has been between 1.65 and 1.45 ever since I started doing my own business and had everything denominated in USD dollars as my base import currency.

In discussions I have always stated that competitive devaluations do not make monetary sense, what is needed is a healthy dose of consumption and deficit spending without a war if necessary. This is the wrong environment for competitive devaluations but a managed forex within a band in my view makes more sense.


Locke

 

[Goh Meng Seng]

Really Mr Goh, with due respect, I'm not quite interested to debate you, at least until you proof to be less of a parrot. The USD has been appreciating against all currencies bar gold the past few months. Where have you been??? What do you want of the SGD? Same strength as the USD or higher still?? Does it make economic sense for Sg to have a strong dollar viz-a-viz the rest of the currencies? No wonder your team fared 'so well' last time.

It got nothing to do with what I want of SGD. It is MAS policy to maintain currency stability and US$ as the international currency is one of the main currency in the band.

There are no reasons for USD to appreciate in the long run in view of the billions and trillions of USD that the US government is throwing. Of course, other countries are also throwing money at the same time but the problems that the US faces is more severe than anyone else.

The temporary volatility seen (as in the case of Yen) may be an indication of money being repatriated to US and the billions of "rescue" dollars rushed into US at this period of time. But the long term prospect of USD is very dim.

Yen has been appreciating in the general direction, without doubt. Chinese Yuan too, as contrast to Euro from Jul 08. Euro declined partly because it was adversely affected by the crisis whereby their financial system is also badly hurt. And please bear in mind that these two countries are mindful about the harmful effect of the appreciation of their currencies.

But Singapore's financial system is hardly badly hit by this crisis, just like Euro, why did it depreciate just like them? And Singapore is supposedly with a controlled peg.

Thus, if it is not quietly done or allowed by MAS, then who else will have such power to over come MAS pegging?

Thus, this is no hearsay. It is real.

Goh Meng Seng

Just to add, look at HK dollars which is supposedly to be peg to USD with a band. It has appreciated instead of depreciated, unlike Singapore. What's missing?

http://hk.finance.yahoo.com/currency/convert?amt=1&from=USD&to=HKD&submit=%A7I%B4%AB

 

[Goh Meng Seng]

Dear GMS

Honestly movements within a band should not concern anyone but professional traders like London. The historical peak and through has been between 1.65 and 1.45 ever since I started doing my own business and had everything denominated in USD dollars as my base import currency.

In discussions I have always stated that competitive devaluations do not make monetary sense, what is needed is a healthy dose of consumption and deficit spending without a war if necessary. This is the wrong environment for competitive devaluations but a managed forex within a band in my view makes more sense.


Locke

Dear Locke,

We would love to have currency stability, really. But when you are facing a 35% drop in export, any government would be very worried indeed.

I am not so sure about the overall impact but it seems that my school mate is in favor of the devaluation of S$.

Goh Meng Seng

 

[lockeliberal]

Dear GMS

The US dollar has been strengthening against all currencies not just the SG dollar despite rightly the amount of greenbacks flooding the domestic market. Guess it comes with being a reserve currency :_)). Your argument does not stand , that MAS is engineering a competitive devaluation, rather its an irrational market strengthning.the US dollar



Locke

 

[Goh Meng Seng]

Dear GMS

The US dollar has been strengthening against all currencies not just the SG dollar despite rightly the amount of greenbacks flooding the domestic market. Guess it comes with being a reserve currency :_)). Your argument does not stand , that MAS is engineering a competitive devaluation, rather its an irrational market strengthning.the US dollar



Locke

If that is the case, why the pegged HK dollars appreciate against USD? Yen? Chinese Yuan? Is something missing here? If S$ is supposed to be pegged according to the band, it should not react in such a way.

Reserve currency does have its advantage but it really puzzles me. China and Japan are main exporters to US, why did their currency held against US while others tumble? And Hong Kong?

Goh Meng Seng


Goh Meng Seng

 

[lockeliberal]

Dear GMS

I can't speak for HK's peg policy vis sa vis the US dollar and vis sa vis its managment policy against other currencies. That is after all HK's perogative. All I can say is that the US dollar is strengthening currently and that SG Dollar deprecaition does not seem that far off in light of recent international currency movements.

Locke



19 February 2009 1151 hrs



Photos 1 of 1

A clerk counts yen notes


TOKYO: The US dollar was close to a six-week high against the yen and a three-month peak versus the euro in Asia Thursday as worries mounted about the woes of the Japanese and European economies.

The dollar rose to 93.81 yen in Tokyo morning trade from 93.72 in New York late on Wednesday, to levels last seen in early January.

"The yen is rapidly losing its 'safe haven' status thanks to Japan's gross domestic product slumping at twice the pace of the other major economies," said NAB Capital analyst John Kyriakopoulos.

The yen rose sharply after the global financial crisis erupted because it was seen as a less risky bet than other major currencies.

But after Japan's economy suffered its worst quarterly contraction since 1974 and its government was rocked by the resignation of the finance minister, the yen appears to be losing some of its appeal, dealers said.

The dollar got a boost after US President Barack Obama on Wednesday announced a 275-billion-dollar housing bailout that would help up to nine million people refinance their mortgages.

The euro meanwhile has been wounded by growing concerns about the health of the eurozone economy and its vulnerability to the troubles of Eastern Europe.

The euro was at 1.2580 dollars, after sinking to 1.2513 on Wednesday, the lowest point since November 21. The euro rose to 117.80 yen from 117.45.

Markets were eyeing a meeting between German Chancellor Angela Merkel and EU Commission President Jose Manuel Barroso later in the day, amid speculation Berlin may unveil measures to help other European economies.

"I think Merkel will announce something positive, which may be a factor to support the euro," said Societe Generale chief forex strategist Yuji Saito.

"However, given the risks facing the Eastern European economies, if Berlin does decide to support them, that will weigh on (Germany's) finances. There is no silver bullet," he added.

Spain and Ireland last month had their debt ratings slashed, while there is concern European countries may be the next in line.

Markets were also waiting for a Bank of Japan policy decision meeting later in the day. Investors expect interest rates to be left on hold at 0.1 per cent, with attention focused on the central bank's efforts to help companies gain access to vital credit flows.

- AFP/yt

 

[Goh Meng Seng]

I am looking at the turn of trend from Jul 2008 onwards. Short term volatility will not show the policy intention or trend at all.

The proper comparison should be made between HK and Singapore because BOTH have an open economy heavily dependent on export, especially to US. Both have practiced a certain pegging system for their currencies. And both do not seem to have their financial systems adversely affected by the crisis yet.

Thus, why the difference in the currency direction against USD? The Natural Tendency is for USD to depreciate if you take everything as stagnant with increase of USD money supply. The only reason I can think of is that for many currencies to depreciate against USD may be a deliberate effort of these countries to make it so, so that their exports will become competitive. But intriguingly, Chinese Yuan and Yen stood out from the "normal trends", as well as HK dollars. Why?

Goh Meng Seng

 

[Seee3]

When it comes to currency, all economic theories and considerations can be thrown down the gutter. Currency movement is beyond layman's comprehension. They just move, usually such a way that big timer will stand to gain. So not surprise if S$ drop 20% but definitely it will be done in steps but within a vvery short time and layman has no time to react. Currency is a gamble.

 

[londontrader]

Dear GMS,

Both of you (ie. former school mate) have rasied some serious issues.
Allow me to share some views on the subject:

Firstly, on a less serious note,

<< Are you really a trader in London? >>

I am currently back in Singapore after recently accepting a post in a Singapore bank. A timely move given the highly unfavourable environment in London (ie. waiting to get retrenched!). I've retained the "londontrader" moniker for sentimental reasons.

<< maybe you could consider running for elections in Singapore! >>

I'll probably get fired the minute snr mgt gets wind of any such inclination. My new employer is extremely close to you know who.

Now for the serious stuff,

<< 1) The deflationary pressure on commodity prices as well as oil may just off set the inflationary pressure caused by such a depreciation move. >>

Agree that some amount of offset is available. The MAS projects 2009 inflation to fall below 2%, based on the current deflationary trend in raw material prices and a very soft economic environment.

We can actually estimate the amount of offset available by examining the extent of exchange rate pass-through in Singapore. I will skip all the technical bits (you're welcome to read the empirical papers) and summarize the findings. Under robust economic growth, a 1% appreciation leads to a 0.24% fall in domestic import prices. During sluggish economic conditions, a 1% depreciation leads to a 0.5% rise in domestic import prices ie. evidence of an asymmetric pass-through over the business cycle.

Therefore, I think you can see that such a large (and quick) 20-30% devaluation still poses inflationary risks, despite a very slack economic environment.

<< 2) Most MNCs or foreign investors have their earning in US $ via trade while paying wages in Singapore dollars. Thus, it may not affect MNCs' confidence because they import raw materials using US$, paying wages in Singapore dollars and export the finished products in US$. Thus capital flight will be limited while cost of production decrease, implying export prices will be reduced. >>

I see that your friend has some knowledge of economics. The standard response to this kind of suggestion is that a wage price spiral will negate all the positive effects you refer to. A non standard view of economic theory suggests that such a wage price spiral might be avoided because of the fear of unemployment (very real in the current context). Unfortunately, your suggested policy will incur high social and political costs.

There is an alternative approach using direct measures (ie. supply-side policies) to reduce the real exchange rate. Such measures would target wages, rentals and utilities etc.. Sounds very much like the recent budget statement, right? The govt incurs less social and political costs with this approach.

<< 3) According to the I/O (Input/Output) table researched by some NUS don, the local inputs in export may be higher in percentage than previously thought. This is mainly due to past appreciation of S$ as well as increase in rental, indirect taxes and local wages. Thus a depreciation would actually help to lower export prices, making it more attractive to Foreign investors. >>

My analysis is based on the latest I/O data made available by MTI and SINGSTAT. The cost share of domestic inputs seems fairly stable at around 40%. You have some data that disputes this?

<< 4) A depreciation of S$ would naturally mean lower wages for Foreign workers in relative terms to their home countries' currencies. It would mean a downward adjustment of supply of Foreign workers or that translate into higher cost of employing Foreign Workers when Singapore's wages become less attractive. The past appreciation of S$ is part of the reason why foreigners wanted to come and work in Singapore. >>

Yes, and again this govt prefers using direct fiscal measures to tackle this issue. Afterall, that is a more targeted approach as opposed to using the exchange rate ie. using a bomb to kill a fly.

<< 5) MAS might have not used forex as a monetary tool in the past but it seems that with the pressure of drastic cut in export as well as local pressure on foreign workers displacing local workers, this may become a weapon of last resort. >>

Actually, our exchange rate has been the intermediate target for our monetary policy since 1981. I think what you meant to say was that export competitiveness has not been an explicit objective of our monetary policy, right?

I agree that the export picture is increasingly distressful and the FT issue is inciting strong emotions. However, there are quite a few options available before resorting to the "nuclear bomb" ie. a sharp devaluation!

<< 6) While you are right that a drastic depreciation may cause knee jerk panicky reaction on foreign investors of hot money, >>

Singapore is now a major financial centre and wealth mgt hub. Just imagine the dramatic loss of confidence if this govt engineers a sharp sudden devaluation (something they have promised never to do). I think Singaporeans as well as foreigners will be net sellers of SGD.

<< but it would be even damaging if there is a gradual movement of opaque policy adjustment which will cause more speculative attacks. >>

A speculative attack occurs when there is a consensus that a currency is wildly overvalued subject to fundamentals and a lack of faith in the ability of the central bank to defend the currency.

That is hardly the Singapore story right now! The last time we had a proper speculative attack was in the 1980s. MAS has since redressed the mistakes of that period.

<< It means that if MAS announced 20% depreciation and promise to keep it at that, the shock may only occur in a short time frame and confidence of MAS effort in maintaining that level would be restored, in view of the amount of Forex reserves that MAS has. >>

Actually, I think the reverse will happen. Investors will lose confidence in a govt that has broken a fundamental promise to maintain exchange rate stability. You will see the beginnings of a serious flight of capital from both foreigners and Singaporeans. The immediate response to a 20% devaluation is to sell the SGD heavily on expectations that others will do so and that the MAS may have to devalue again (in response to rising protectionism). Now the significant amount of reserves should enable the MAS to defend the new level (if they choose to) at a HUGE COST. But the damage to confidence will linger for a long time ie. you can forget about Singapore being a serious financial centre.

Also, our financial markets are linked closer than ever. Any chaos in the FX mkt will spillover into every mkt with contagion throughout the region. Every other export driven economy will be accorded a higher risk premium because of devaluation risk.

<< But if there are signs of gradual depreciation without any announcement, speculation may be built up and eventually snowballed and speculative attacks may actually worsen the situation. >>

We get 2 monetary policy statements a year and the current signal from the MAS is one of accommodation ie. gradually depreciating SGD. The mkt is already expecting gradual depreciation over 2009. Sharp devaluations are the subject of rumours that no FX person takes seriously (or else they'll trade on the information).

To be Continued............