Thursday, 10 September 2015

Global currency devaluation in transitional stage?


The current global economic turbulence is attributed to two primary causes, namely China's surprise devaluation of Yuan and the possible interest rate hike by the United States Faderal Reserve soon.
China had been the consumer market for many emerging economies, and Malaysia included. The nation current economic and industrial activities have slowed down affecting commodities export of the smaller economies round the globe.
On the other hand the desire to implement interest rate rise by the US, as its economy has significant recovered and has hence strengthening of the Dollar, has led to devaluation of many currencies round the world.
These respective occurrences by the two world large economies; one is trying to balance its economy while the other trying to normalise its fiscal policy have created a significant uncertainty in the global economy.
Although the phenomenon is transitional the situation has rendered difficulty for most governments to manage their respective economies.
The declining oil prices have exerted pressure on Malaysia’s economy, which indirectly contributed to the depreciation of the ringgit.
Analysis shows that the Ringgit has the highest correlation with oil as compared to major Asian currencies.
In addition heavy attrition of equity and bond markets, due to investors’ interest in the promising US expanding market and interest rate rise, continue to further down weigh the Ringgit.Other factors such as; drop in commodity prices, slowerTRADES among emerging economies, outflow of foreign funds, selling of foreign currencies by emerging economies, increasing in household debts and market sentiment are amongst factors that contributed to the devaluation of the Ringgit.
Other factors such as a drop in commodity prices, slower trade among emerging economies, outflow of foreign funds, selling of foreign currencies by emerging economies, increasing household debt and market sentiment are aming factors that had contributed to the devaluation of the ringgit.
Meanwhile, economists are of the opinion that the repeat of the Asian financial crisis of the 1997 is not likely due to the experiences gained by most of the Asian governments.
Most of the Asian nations are now having largerFOREIGN EXCHANGE reserve, practicing floating-rate regime and financial system that are better managed and more robust.
The financial meltdown, akin to 2008 episode too is not likely due to the fact that global banking system nowadays is much healthier that was prior to 2008.
Economists are also of the opinion that there is clearly a severe misalignment in the value of the ringgit, in term of its fair value or in economic term the “fundamental equilibriumEXCHANGE RATE”.
The Ringgit, which is being backed by strong underlying domestic macroeconomic fundamental, is expected to revert to its equilibrium fair value of between RM3.50 to RM3.70 to a US Dollar in the medium term as the market pressure began to subside.
The local automotive industry may draw some benefit by the recent depreciation of Japanese Yen counter balancing the Ringgit depreciation.
Japan has been undergoing slow growth constraint by its high public debt. The Yen, which have been weak for nearly six years against the US Dollar, is expected to further devalue as the US increase its interest rate soon.
The Yen devaluation could bring benefit for some local vehicle distributors and assemblers with lower cost of imported parts and components from Japan.
However for those automakers with most of its parts and components outsourced outside Japan or dominated in US Dollar little benefit is foreseen from the Yen depreciation.
Therefore there is a need for local automotive players to evaluate the impact of currency devaluation of both the Ringgit and the Yen with respect to their parts and components supply for greater benefit of the local automotive industry, while the value of ringgit remain transitionally low.

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