Forex traders ignore threat of volatility at own risk
▶ Previously Asia’s most unstable currencies, the rupiah and ringgit seem to have settled down – and the consequences could be dangerous
Policymakers in Indonesia and Malaysia have been so successful in quashing currency volatility that this is breeding a new danger: complacency.
Traders are being deprived of the experience to cope when fluctuations inevitably return, according to Bank OCBC NISP in Jakarta. At the same time, companies may cut back on hedging, exposing themselves to potential losses, says Sinarmas Sekuritas.
Three-month historical volatility for Indonesia’s rupiah has slumped for four straight quarters, falling to a four-year low of 2.5 per cent in May from as high as 16 per cent in 2013. Malaysian ringgit volatility has shrunk by two thirds this year to 2.9 per cent. The two currencies were previously the most volatile in Asia – now they are the least after China’s yuan.
“The problem with stability is that it generates instability because you become complacent,” says Michael Every, the head of financial markets research at Rabobank Group in Hong Kong. “You think things will always be the same and you don’t bother hedging and looking at risks at how things could change. You build the entire house on the beach and then the tide comes in and it gets swept away.”
The central banks of Indonesia and Malaysia both took steps last year to limit currency swings after volatility surged following the election victory of the US president Donald Trump. Bank Indonesia said it stepped in to stabilise the rupiah on November 11 and traders have reported officials have been in the market regularly since then.
Bank Negara Malaysia cracked down on speculators around the same time as the ringgit slumped toward the weakest since the 1998 Asian financial crisis. Policymakers enforced pre-existing curbs on trading in offshore non-deliverable forwards, which some investors said made it more difficult to hedge currency exposure.
Malaysia’s central bank has continued its clampdown, saying last week offshore ringgit derivatives traded on the exchanges of neighboring Singapore contravened its laws. At the same time, it has tried to address investor concerns by allowing funds to fully hedge their currency exposure.
The ringgit has stayed between 4.25 and 4.30 per dollar since the end of May, compared with 3.85 to 4.49 last year. The rupiah traded in a range of just 1.3 per cent in the second quarter, versus a quarterly average of almost 9 per cent since 1991.
“It’s in the best interests of the economy to have deeper currency and interest-rate markets with sizeable liquidity to execute, in order to support our aspirations for growth in the Indonesian economy,” said Johannes Husin, the managing director for treasury at OCBC NISP in Jakarta. “It’s important for all Indonesian market stakeholders to stay alert and agile, in skill and in talent development, to cope with continuous changes in the global financial markets.”
Companies are also at risk from low volatility as they will be tempted to save costs by forgoing currency hedging, said Jeffrosenberg Tan, the head of strategy at Sinarmas Sekuritas in Jakarta.
“Looking at the stability of the currency, I’m sure they will have less hedging,” he said. “Right now the global liquidity is still abundant and there are lot of funds flowing into emerging-market bonds. As long as that continues it’s fine, but in one or two years from now, if they have to pay the debt at a higher USD rate, they will have a problem.”
Indonesian companies excluding banks and insurance companies, have US$40 billion of outstanding dollar-denominated bonds, according to data compiled by Bloomberg.
Not everyone is being turned off by the dwindling volatility. The new-found stability is boosting the appeal of carry trades, which involve borrowing in lower-yielding currencies and investing in higher-yielding ones.
“Declining foreign-exchange volatility for the rupiah and the ringgit increases the attractiveness of carry from a foreign investors’ perspective,” said Divya Devesh, an Asia foreign-exchange strategist at Standard Chartered in Singapore. “Valuations are very attractive for the ringgit, while high volatility-adjusted carry should keep the rupiah supported.”
The rupiah’s stability and rising demand for emerging-market assets lured $8.3bn of inflows into Indonesia’s bonds in the first seven months of the year. That is the most for a comparable period since Bloomberg started compiling the data in 2010. Foreign holdings of Malaysia’s bonds have climbed from a two-year low in March.
Bond issuers from the Asian Development Bank to the International Finance Corp are considering selling debt denominated in rupiah to global investors, which Indonesia’s financial services authority plans to facilitate.
The lack of volatility still reduces the appeal of the two markets, according to Samsara Wang, an emerging-market strategist at Credit Agricole CIB in Hong Kong.
“Given the rupiah is expected to be rangebound this year, not much value can be dug from it,” she said. “There isn’t much profit that can be earned in the short term as the levels are trapped in a tight range. The
thin profit will be consumed by the bid-ask spread anyway.”
Elsewhere in South East Asia, one country is painting a different picture.
Seoul stocks are still be finding favour with investors seeking bargains globally, even as Mr Trump and North Korea’s Kim Jong-un’s aggressive rhetoric drives the benchmark gauge down.
Seven of top 10 gainers on the Kospi 200 Index since Mr Trump’s “fire and fury” comment on August 8 include the cosmetics maker Cosmax, which soared 13 per cent over four trading days through Monday, Youngone, a garments producer that rose 11 per cent, and furniture maker Hyundai Livart, which rallied 5.1 per cent. The index itself slid 2.6 per cent.
While South Korean stocks suffered their worst week since February 2016 as Mr Trump dialled up his warning to North Korea on threats to US allies, investors including Shinyoung Asset Management and Korea Investment Management said the sell-off is an opportunity to snap up consumer companies as the president Moon Jae-in takes steps to stoke demand.
“The North Korean issue is a meaningless assumption, a short-term issue to be resolved,” said Jung Sang Jin, a fund manager at Korea Investment. “What’s really important is how the government’s policies impact the market in the long run. The policies are aimed at stimulating consumer spending.”
The MSCI Korea Consumer Discretionary Index of 18 companies is at a three-month low even as consumer confidence remains buoyant amid Mr Moon’s pledge to boost spending, exposing a gap between the economy and investor sentiment on the sector. Consumption improved in June and the momentum may continue in the second half, according to the finance ministry.
Measures taken by Mr Moon to boost household incomes include a hike in minimum wages, an increase in taxes for companies and high-paid workers, and an expansion in coverage of national health insurance.
“We’re buying some consumer stocks that have been oversold,” said Huh NamKwon, the chief executive at Shinyoung Asset Management. “The government is focusing on domestic consumption.”
Kospi index rose as much as 1 per cent on Monday, set for its first gain after four days of losses and rebounding from a three-month low. US national security officials sought to calm fears of imminent nuclear war with North Korea, while US general Joseph Dunford, the chairman of the Joint Chiefs of Staff, visited Seoul on Monday to meet with Mr Moon.
Consumer stocks are also attracting investors rotating out of Korean technology shares, according to Korea Investment.
Samsung Electronics is down 6.6 per cent so far this month after rallying to a record in July, while SK Hynix has slumped 13 per cent from a 16-year high reached last month. Global funds sold net 848bn won (Dh2.73bn) of Samsung shares in the three days through Friday, the most on the Kospi Index, and pulled a net 219bn won from SK Hynix.
For stock pickers, South Korean equities are still cheap, Shinyoung’s Huh said.
The Kospi trades at about 9.8 times of one-year forward earnings, compared with 14 times for the MSCI Asia Pacific Index. Per share earnings of the gauge’s members are projected to jump 77 per cent over the next year.
“South Korean equities fell not because they are expensive, but because of country risk,” said Mr Huh, a 30-year veteran of the nation’s equities. “I’ve seen people betting against country risk always becoming winners in the market.”
Given the rupiah is expected to be rangebound this year, not much value can be dug from it