SE Asian monies quiet as ringgit issues dominate

SE Asian monies quiet as ringgit issues dominate

SINGAPORE (Dow Jones): Activity in Southeast Asia's foreign exchange markets was muted on Friday, as participants grappled with the problem of untangling their ringgit exposure before Bank Negara's September 9 deadline for the settlement of outstanding positions.

And regional currency markets are likely to remain quiet into the coming week, said traders and analysts, as settlement problems continue to monopolize attention, at least until the middle of the week.

At the end of Asian hours on Friday, the Singapore dollar was trading higher on the day, boosted by the overnight rise in the Japanese yen. The baht and the Philippine peso, however, both closed lower, pushed down by domestic influences.

In North Asia, the announcement by credit ratings agency Moody's Investors Service that it was placing on review for potential downgrade the foreign currency debt ratings of both China and Hong Kong had relatively little impact on trading in foreign exchange markets.

The settlement problems arising from Malaysia's decision last Tuesday to impose stringent capital controls on ringgit flows are set to dominate regional markets for the immediate future, to the exclusion of almost all trading activity, say participants.

"It is impossible to decide what will happen next week," said the head of regional spot foreign exchange at one U.S. bank in Singapore.

"What happens on Monday, Tuesday and Wednesday will be critical. Banks will be monitoring their cash flows very carefully."

After Malaysia followed up the introduction of capital controls with a decision on Wednesday to peg the ringgit to the U.S. dollar at an exchange rate of 3.80, banks offshore in Singapore agreed to settle outstanding exposures among themselves in U.S. dollars without involving Bank Negara.

All outstanding positions, including ringgit deposits, are to be netted out between the banks with the residual exposure settled in U.S. dollars at an exchange rate of 4.00 ringgit to the U.S. dollar. Forward contracts will be settled according to the forward curve prevailing at the same time.

Not all market participants are satisfied with the deal, however.

One senior executive at a European bank admitted to spending the entire day on Friday explaining to irate ringgit depositors why they should pay a 5 percent penalty by accepting an exchange rate of 4.00 instead of the 3.80 available onshore.

"It was easy reaching an agreement between the interbank players in the offshore market, but clearly, corporate clients and the banks onshore are talking another language," lamented the U.S. bank's foreign exchange chief.

Although trading is expected to be muted throughout the coming week, the political turmoil in Malaysia following the sacking on Wednesday of Malaysian Finance Minister and Deputy Prime Minister Anwar Ibrahim is likely to weigh on the Singapore dollar, said traders.

While further yen strength could boost the Singapore currency, the U.S. dollar is likely to be firmly supported above S$1.70, they said.

In the longer term, any damage inflicted on the Malaysian economy by the adoption of capital controls will have repercussions on Singapore's economy, potentially pushing the U.S. dollar as high as S$1.85 to S$1.90, according to traders at one U.S. bank.

Late in Asian trading on Friday, the U.S. dollar was quoted at S$1.7515, down from S$1.7609 towards the end of Asian hours on Thursday.

Meanwhile, both the baht and the Philippine peso eased back on poor sentiment towards the region in general.

On the Philippine Dealing System, the U.S. currency ended the session at 43.76 pesos, compared with 43.43 at the previous close.

Dollar sales by offshore funds keen to cut their positions in regional markets are likely to cap the U.S. dollar's rise against the Thai currency at 41.00 baht, however, while domestic demand for U.S. dollars should hold the U.S. currency above 40.00, say traders.

Late in the Asian day, the U.S. dollar was quoted at 40.93 baht, up from 40.80 the day before.

Meanwhile, against the Indonesian currency, the U.S. dollar ended at 10,858 rupiah, little changed from 10,788 late on Thursday.

In North Asian markets, the Korean won slipped on heavy domestic demand for U.S. dollars, while the new Taiwan dollar ended higher on sales of the U.S. currency by the central bank.

Against the won, the U.S. dollar closed at 1,343 won, up from 1,341 won the day before.

Against the Taiwan currency, the U.S. dollar ended at NT$34.686, down from NT$34.746.