We had an interesting string of events this week :
-dollar was hammered
-gold shot up
Asian central banks said to be intervening in currency markets overnight by buying dollars included South Korea, Hong Kong, Taiwan, Thailand, the Philippines and possibly, Indonesia, according to analysts. (Reuters)
A pathetic fart. And the perfect Dance of The Suckers.
And indeed the Bank Of Thailand does confirm :
The Thai baht, Asia’s fourth best-performing currency this year, is rising too fast this month and the Bank of Thailand is taking action to slow its rise, an assistant central bank governor said on Thursday.
‘Somedays its strength is beyond economic fundamentals,’ Suchada Kirakul told reporters. ‘The baht is strong and we are still taking care of it.’
‘Our economic factors are not as good as others’, so we (our currency) does not need to rise as fast as theirs’,’ she said. [...]
The BOT has been in the market frequently in recent weeks to curb baht gains, but the currency has climbed fast after breaking 33.50 — a level which the market suspected would trigger intervention. (Forbes)
First, you’ll notice : they spend a huge amount of energy to convince us that the Recovery (hats off) is there, but… meanwhile they tell us that the thai economy is not as good as others… And therefore, cry baby, the local currency should not increase versus USD.
Let’s make it clear : the THB is not “strong”. What is happening is that the USD is falling. Period. And a lot of smart money is going into asian and emerging countries. It’s mechanical : offer and demand… People want to invest in Asia (and to fly away from USD), so they have to buy local currencies, and so they are selling US. Therefore the exchange rates of those local currencies are going up.
But it’s too complicated for the Suckers. It’s politically incorrect. Because the Recovery is nothing but a fiction, they all want to boost their exports… at the expenses of others.
It’s the famous Beggar thy neighbour policy, through competitive devaluation (or at least competitive-not-valuation).
The famous blogger Mike Shedlock summarizes it perfectly :
Every country wants to grow by ramping up exports in a world of decreasing consumer demand. To achieve that end, every country wants its currency to be weaker against every other currency. Of course that is logically impossible.
Logically impossible indeed. But again, it’s too complicated for the Suckers to understand this.
The BOT is buying USD through forward positions.
From a low point of 3,68 billions USD end of february… the total forward positions increased to 15,63 billions last week.
It means we can’t even see the “‘interventions” of this week in the current chart (we will have to wait 7 days more).
To know more about forward positions, you should read my article of last december : The case of the forward positions : the coal mine canary.
Forward positions = Bank of Thailand’s forward obligations to buy (long) or sell (short) foreign currency against Thai Baht.
For that matter, they are like a “peek” at how the reserves will behave in the future.
By the way, I was perfectly right. I wrote that eventually the BOT would follow the asian bias, to save thai exports.
And I spoke about the “joker” too.
And this is the true frightening part… USA are doing exactly the same (but for different reasons, not exports). The USD is condemned to loose value. It’s inescapable (zero interest rates, massive printing of money, mountains of debts, etc.)
So you start to understand the problem : we have a freaking race toward zero, a race toward the bottom. What could happen if all the countries in the world see their currencies going down ? At the same time ? It’s insane.
Yes… this is exactly what is happening now… and this is why gold is going up ! Paper money is toilet paper.
Anyway. Back to the BOT and asian central banks.
Interventions do not work. They can’t control the forex market. Because it’s just too huge. Japan was a famous “currency manipulator”… At least on intends side… But it didn’t work. So of course, if we speak about scale, the BOT’s small farts will change nothing.
Only one thing could work… They did it not so long time ago… You don’t remember ?
Capital controls !
Yes ladies and gentlemen… In december 2006, three months after the Coup… And the situation was exactly the same : the THB was shooting up against the USD. At that time already, the obsession was to save exports sector.
One last word : when we speak about “saving thai exports”… it’s not really a matter of competition. I think it’s even simpler than that. It’s a matter of liquidities. For the whole economy.
Thai companies convert in THB (most of) the USD they earn outside Thailand (this exchange was even compulsory before... the BOT changed the regulations in 2008 , read here).
It’s very simple to understand :
-1-with an USD-THB exchange rate of 40, when you export 1000 USD of goods, you receive 40 000 THB. You feel rich. You can use this money to invest, to buy stupid and overvalued condo in Bangkok… The builders will earn money… Workers have work… The economy is running. People are happy. So politicians are happy too, and they can steal more money.
-2-with an USD-THB exchange rate of 33, when you export 1000 USD of goods, you receive 33 000 THB. You feel much poorer. You won’t buy a third condo for your children. Or to rent to stupid foreigners who won’t come to Bangkok anymore. Builders will earn less money. Unemployment rises. The economy is choking. People are not happy… And politicians are scared… And they can’t buy another Mercedes Benz with the money they can’t steal (and that’s really inhumane ).
Liquidities = lubricant = fuel = gasoline onto the fire.
The thai economy (along many other asian countries) is not really healthy (at this stage). A large chunck of the “growth” we have had in the recent years… was a mirage. Fueled by cheap currencies. Remove the lifeline of a strong USD… what do we have left ?
Abhisit’s smile ?
Not quite enough to save us…
PS : I advise you to read the latest piece of Eric Janszen, about inflation on the long run… What he calls inflation via currency depreciation : the stealth currency devaluation. It’s radiant.
You’d think the deflationists would wonder how oil prices are above $70 in 2009 when demand is lower and inventories higher than in 2001 when the economy was nominally 15% smaller and oil prices averaged $22 after a very brief recession. [...]
The U.S. monetary system is not on a gold standard in 2009 as it was in 1933. Instead the U.S. and the rest of the world monetary regime employ a de-facto global oil standard.
To prevent a liquidity trap via currency depreciation, instead of depreciating against gold the U.S. government depreciates the dollar against oil.
On one hand, we have Mike Shedlock, the Great Deflationist. And the other hand, what Mish calls the inflationistas. This debate deflation versus inflation is raging. Personally I’ve picked up my side : both.
Mish is right : we are in deflation (assets prices / debts deflation). But Janszen is right too : on the long run, the bias toward a slow debasement of the value of money is just too appealing for the politicians (nothing new, the roman emperors did the same).