Asian central banks tighten grip

Asian central banks tighten grip

SINGAPORE (Reuters): Central banks in Indonesia and Thailand may huff-and-puff and impose hefty fines on banks for breaching their newly imposed forex rules, but analysts reckon they are basically impotent and can do little to bring about a sustained respite for the sickly rupiah and baht.

Jitters over the U.S. economic outlook and the beleaguered yen, combined with domestic ills strongly argue for commercial and speculative sales of both currencies, they said.

Speculative selling is still legitimate, but central bank restrictions have hampered the ability of commercial banks to carry out such strategies.

"The message these central banks sent to the market was loud and clear. They are not going to take currency speculation lying down," said a senior dealer at one European bank in Singapore.

"What happened last week caused resentment and irritation in the market. It might help in the near-term but it won't reverse the direction of the currencies given a barrage of bad news from both external and internal fronts. Investors are tempted to short most Asian currencies if they can," he said.

Bank Indonesia on Thursday said it had fined a foreign bank 9.0 billion rupiah ($897,800) for breaching foreign exchange rules aimed at stamping out offshore rupiah speculation.

It did not name the bank, but Standard Chartered Bank has said its Indonesian operation was fined by the central bank over three transactions totaling only US$3.0 million.

In Thailand, the central bank last week banned one foreign bank from accessing cheap funding in its repo market for 10 days for breaking new disclosure rules.

Despite the moves, the Thai baht continued to slide against the dollar to 44.00 from around 43.80 late last week, and the rupiah was trading below 10,300 from around 10,000 when the news broke on Thursday.

Sources in Jakarta and Bangkok said the mistakes were caused mostly by human error and confusion.

Those factors aside, dealers said there were strong incentives to circumvent central bank rules and short these currencies given most people believe the rupiah and baht would drop further.

"The only thing that holds us back on the rupiah is the lack of liquidity," said a currency strategist at an Asian bank in Singapore.

If investors sell the baht now, and it falls to 45 per dollar in one month, they would gain over two percent.

Some analysts have recently revised their rupiah forecasts down to 12,000 by end-June, with a few believing it could plunge as low as 15,000 if Indonesia's political turmoil worsens.

Another senior bank treasurer said foreign banks were more willing to breach forex rules in Indonesia than in Thailand.

"Most foreign banks have far more exposure in corporate business in Thailand than in Indonesia, and therefore they are afraid to upset the Bank of Thailand," he told Reuters.

"Bank Indonesia might be aware of this and that's why it imposed such a hefty fine on the foreign bank last week to scare the market," he said.

Stanchart called the fine excessive, saying the alleged breach of regulations concerned "operations mispostings" which were corrected and reversed the following day. BI then said it might revise the penalty.

Bank Indonesia tightened its forex rules in January by banning rupiah transfers from local banks to non-residents. It also cut the limit on forward transactions between onshore and offshore parties to $3 million from $5 million.

The Bank of Thailand tightened its disclosure rules in February, requiring banks to give detailed information about offshore counterparty deals such as the purpose of the deals, name of counterparties, when positions were taken and covered.