Title: Research & Analytics Notification
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----- Original Message -----
Sent: Saturday, July 23, 2005 6:13 PM
Subject: Market report 1: FX Intraday Update: Asia's new
baskets
Assalamualaikum
For those interested to read the full report, pls email
me by 30th July
| FX Intraday Update: Asia's new
baskets |
Asia FX: A look at Asia's new baskets
·
Below we give what we believe are approximations to the eventual likely
structures of Asia's two new basket exchange rates, the Chinese yuan and
the Malaysian ringgit, and for comparison, the region's benchmark basket,
the Singapore dollar (Tables 1 - 3).
· For the ringgit and the yuan
we view the tables below as a look into a possible future, not the current
structure of their respective exchange rate "baskets".
· In the
short term of the next several weeks, we expect the effective weight of
the US dollar in these baskets to appear to be 90% - 100%. This implies
these exchange rates may look more like low volatility crawling pegs to
the dollar than the current arrangements in Singapore.
· To be
sure, assuming the Chinese authorities were pursuing anything other than
depreciation of their exchange rate basket today, the mechanics of a
Singapore-like basket would have required dollar-China to fall today, not
remain unchanged at 8.11 as it did. This is because almost all of the
currencies likely to be in such a basket appreciated against the US
dollar. For an unchanged dollar-China, the appreciation of the other Asian
currencies against the dollar should translate into a depreciation of the
yuan today on an effective exchange rate basis.
· We think that the
Chinese yuan, and probably the Malaysian ringgit, will go through a
transition period over the next 3 - 6 months. During this time, we expect
their central banks to allow volatility in their currencies vs. the US
dollar to rise only very gradually. One way of thinking about this is to
imagine that the dollar weight in their baskets will start high, as we
note above, and gradually fall as the central banks become more confident
in their ability to manage their newly flexible rates and the impact of
these on their economies.
· If we are correct, this process should
lead initially to low but rising volatility of the exchange rate to the
dollar and initially high but falling volatility of the basket value.
Chart 1 below suggests that in Singapore SGD basket volatility is lower
than dollar-Singapore volatility. It also implies that ultimately there
will be days when these countries targets for their baskets will require
them to depreciate their currencies vs. the US dollar to adjust to dollar
movements against the other currencies in their baskets.
· We
expect China to accomplish this transition by periodically widening the
volatility bands around its reference rate for dollar-China from the
current 0.3%.
· We currently expect this process to take at least
six months and probably more like a year. |
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