Losing streak: The greenback finished the first half of 2017 on a four-month losing streak – the longest such stretch since 2011. – AFP
After the worst start to a year for the greenback since 2006, the end of the first half couldn’t come quick enough for the dwindling ranks of dollar bulls. Yet if history is any guide, it could soon get even worse.
A week that’s certain to get off to a slow start with U.S. markets closed Tuesday will culminate with Friday’s jobs report. The release hasn’t been kind to those wagering on greenback strength. The Bloomberg Dollar Spot Index has slumped in the aftermath of nine of the past ten, despite above consensus reports as recently as February, March and May.
“The dollar has not been responding to positive data surprises, but continues to weaken substantially on negative news,” said Michael Cahill, a strategist at Goldman Sachs. “As long as that persists, the risks are skewed to the downside going into every data release.”
The greenback finished the first half on a four month losing streak -- the longest such stretch since 2011 -- wiping out its post-election gain. The currency’s 6.6 percent decline in the six months through June were the worst half for the dollar since the back end of 2010. Unraveling optimism around the Trump administration’s ability to boost fiscal growth has outweighed Fed policy or positive data, according to Alvise Marino, a strategist at Credit Suisse.
“What’s happening on the monetary policy front is not as important,” said Marino. “It’s more about the dollar remaining weighed down by the unwinding of financial expectations.”
The sudden hawkish tilt by global central banks hasn’t helped. The dollar weakened more than 2 percent against the euro, pound and Canadian loonie last week as officials signaled a bias toward tightening monetary policy.
Yet there are reasons for optimism, according to JPMorgan Chase analysts led by John Normand, who recommended staying long the greenback in a June 23 note. A cheap valuation relative to global interest rates, the market underpricing the likelihood of another Fed hike this year, and a still positive growth outlook make for a favorable backdrop to motivate dollar longs in an “overstretched” unwind, the analysts wrote.
Hedge funds and other speculators disagree. They turned bearish on the dollar for the first time since May 2016 last week. Wagers the greenback will decline outnumber bets it’ll strengthen by 30,037 contracts, Commodity Futures Trading Commission data released Friday show.
It is useful to reflect on whether lessons have been learnt and if the countries are vulnerable to new crises.
IT’S been 20 years since the Asian financial crisis struck in July 1997. Since then, there has been an even bigger global financial crisis, starting in 2008. Will there be another crisis?
The Asian crisis began when speculators brought down the Thai baht. Within months, the currencies of Indonesia, South Korea and Malaysia were also affected. The East Asian Miracle turned into an Asian Financial Nightmare.
Despite the affected countries receiving only praise before the crisis, weaknesses had built up, including current account deficits, low foreign reserves and high external debt.
In particular, the countries had recently liberalised their financial system in line with international advice. This enabled local private companies to freely borrow from abroad, mainly in US dollars. Companies and banks in Korea, Indonesia and Thailand had in each country rapidly accumulated over a hundred billion dollars of external loans. This was the Achilles heel that led their countries to crisis.
These weaknesses made the countries ripe for speculators to bet against their currencies. When the governments used up their reserves in a vain attempt to stem the currency fall, three of the countries ran out of foreign exchange.
They went to the International Monetary Fund (IMF) for bailout loans that carried draconian conditions that worsened their economic situation.
Malaysia was fortunate. It did not seek IMF loans. The foreign reserves had become dangerously low but were just about adequate. If the ringgit had fallen a bit further, the danger line would have been breached.
After a year of self-imposed austerity measures, Malaysia dramatically switched course and introduced a set of unorthodox policies.
These included pegging the ringgit to the dollar, selective capital controls to prevent short-term funds from exiting, lowering interest rates, increasing government spending and rescuing failing companies and banks.
This was the opposite of orthodoxy and the IMF policies. The global establishment predicted the sure collapse of the Malaysian economy.
But surprisingly, the economy recovered even faster and with fewer losses than the other countries. Today, the Malaysian measures are often cited as a successful anti-crisis strategy.
The IMF itself has changed a little. It now includes some capital controls as part of legitimate policy measures.
The Asian countries, vowing never to go to the IMF again, built up strong current account surpluses and foreign reserves to protect against bad years and keep off speculators. The economies recovered, but never back to the spectacular 7% to 10% pre-crisis growth rates.
Then in 2008, the global financial crisis erupted with the United States as its epicentre. The tip of the iceberg was the collapse of Lehman Brothers and the massive loans given out to non-credit-worthy house-buyers.
The underlying cause was the deregulation of US finance and the freedom with which financial institutions could devise all kinds of manipulative schemes and “financial products” to draw in unsuspecting customers. They made billions of dollars but the house of cards came tumbling down.
To fight the crisis, the US, under President Barack Obama, embarked first on expanding government spending and then on financial policies of near-zero interest rates and “quantitative easing”, with the Federal Reserve pumping trillions of dollars into the US banks.
It was hoped the cheap credit would get consumers and businesses to spend and lift the economy. But instead, a significant portion of the trillions went via investors into speculative activities, including abroad to emerging economies.
Europe, on the verge of recession, followed the US with near zero interest rates and large quantitative easing, with limited results.
The US-Europe financial crisis affected Asian countries in a limited way through declines in export growth and commodity prices. The large foreign reserves built up after the Asian crisis, plus the current account surplus situation, acted as buffers against external debt problems and kept speculators at bay.
Just as important, hundreds of billions of funds from the US and Europe poured into Asia yearly in search of higher yields. These massive capital inflows helped to boost Asian countries’ growth, but could cause their own problems.
First, they led to asset bubbles or rapid price increases of houses and the stock markets, and the bubbles may burst when they are over-ripe.
Second, many of the portfolio investors are short-term funds looking for quick profit, and they can be expected to leave when conditions change.
Third, the countries receiving capital inflows become vulnerable to financial volatility and economic instability.
If and when investors pull some or a lot of their money out, there may be price declines, inadequate replenishment of bonds, and a fall in the levels of currency and foreign reserves.
A few countries may face a new financial crisis.
A new vulnerability in many emerging economies is the rapid build-up of external debt in the form of bonds denominated in the local currency.
The Asian crisis two decades ago taught that over-borrowing in foreign currency can create difficulties in debt repayment should the local currency level fall.
To avoid this, many countries sold bonds denominated in the local currency to foreign investors.
However, if the bonds held by foreigners are large in value, the country will still be vulnerable to the effects of a withdrawal.
As an example, almost half of Malaysian government securities, denominated in ringgit, are held by foreigners.
Though the country does not face the risk of having to pay more in ringgit if there is a fall in the local currency, it may have other difficulties if foreigners withdraw their bonds.
What is the state of the world economy, what are the chances of a new financial crisis, and how would the Asian countries like Malaysia fare?
These are big and relevant questions to ponder 20 years after the start of the Asian crisis and nine years after the global crisis.
But we will have to consider them in another article.
By Martin Khor Global Trend
Martin Khor (director@southcentre.org) is executive director of the South Centre. The views expressed here are entirely his own.
IT has always interested me to see how the different selection of words sent varied messages to readers and listeners.
Of late, I’m intrigued with the use of oxymorons, a combination of words that have opposite meanings and which usually produces an incongruous, seemingly self-contradictory effect.
Some daily expressions such as “open secret”, “seriously funny”, “deafening silence” and “pretty ugly”, are good examples on how the completely opposite meanings of words create dramatic effect.
Among other oxymorons come an expression often heard among condominium owners to their management corporations (MCs) and management offices: “We want you to lower costs and improve quality.”
Just like any other oxymoron phrases, the statement above makes me puzzle and ponder. It is prudent to manage costs, but unrealistic cost cutting over the long run will lead to decline in the quality of facilities and services.
Based on my experience, quality always comes with cost especially in property management. It is impossible to achieve higher quality standards by reducing expenditure.
I have heard of occasions where homeowners’ representatives in MC set high benchmark for the property management team, but expect them to cut down on the number of workers and cleaners in order to reduce spending. Needless to say, we can imagine what the outcome would be without looking at the property itself.
In reality, MC and homeowners must invest, not spend less for better quality. While developers and property managers play the important role of ensuring the upkeep of properties, the property owners themselves are the main stakeholders in deciding the fate of their properties. They are the party who can approve the budget and usage of their service charge and sinking funds.
In my previous article, I mentioned it is important for homeowners to participate in property management, such as attending AGMs and EGMs to exercise their right to raise concerns and approve the budget during such meetings.
In addition, homeowners and MCs must be bold in making decisions to invest in their properties with the reserved funds they have in their account.
Hence, while it is important to manage cost, it is also important to spend wisely for the future. Inflation is a fact of life, so MCs and homeowners should factor the inflation rate into their service charges, and use the real inflation rate, typically higher than the officially sanctioned rate anywhere in the world.
Typically, service charge is used for the general maintenance of the building. Sinking fund, on the other hand, can be used for the painting and the repainting of the common property, acquisition of movable property, the replacement of any fixture or fitting, the upgrading and refurbishment of the common property, and any other capital expenditure deemed necessary.
Managing a strata property is like maintaining a car. We must service our car regularly and replace its parts when they are due for change according to mileage. If a car is serviced less often, it gets more expensive to fix later when the equipment falls apart, and sometimes it may be too late to change.
Hence, when we reduce spending on maintaining a property, the decline of quality may be slow but sure. It takes time and additional cost when homeowners want to re-invest to restore the property later.
Invest in the future is just like doing exercise. It is hard to do, but if done regularly it will build health, strength and happiness.
To invest in a strata property means to increase, not cut down services such as cleaning, maintenance, security and landscaping. It also means to spend the sinking fund regularly not just on replacements, but also on upgrades, as the world doesn’t stand still. New projects would make existing projects old and even obsolete if we don’t manage our property well.
Investor’s nightmare
How well a property is managed can make or break the value of the property. A quality property management will allow the value to increase; while poor management could translate into an investor’s nightmare.
Active management and upgrading of properties is an important approach to protect our homes and investments. As such, whenever homeowners or property management companies tell me they are able to increase quality and cut cost at the same time, I would wonder whether, “Is this a short-term gain at the detriment of long-term benefits?”
By Alan Tong
Datuk Alan Tong was the world president of FIABCI International for 2005/2006 and awarded the Property Man of the Year 2010 at FIABCI Malaysia Property Award. He is also the group chairman of Bukit Kiara Properties. For feedback, please email feedback@fiabci-asiapacific.com.
Losing streak: The greenback finished the first half of 2017 on a four-month losing streak – the longest such stretch since 2011. – AFP
Ringgit is Asia's strongest currency
