Disruptive Currency Swings

Big swings in currency market is very disturbing.

(WSJ) Moves in the currency markets witnessed during just a few hours of trading early Friday "are typically what we see in a quarter," wrote Kathy Lien, director of currency research at Global Forex Trading in New York.

For emerging markets, rapid currency declines have been "very disruptive," says Richard Clarida, global economic adviser at Pacific Investment Management Co. and a professor at Columbia University. "It ends up impairing confidence in markets and generating an inflation problem."

What Richard said is very correct. Let's take IOI for example. The share plunged terribly, exceeded my way extreme call of the share price to fall to RM 3.00 when it was around RM 4.50. The share closed at RM 2.45/share last Friday. I'm sure a lot of people are very scared and confused now.

The issues involved are nicely summarized by Business Times Singapore:-

1. TA Securities analyst James Ratnam told Bloomberg that IOI had said its Dutch unit Loders Croklaan had hedged against forward purchases of crude palm oil (CPO) extending up to 12 months. The euro has weakened some 7 per cent against the ringgit this year.

2. The resignation of the company's assistant financial controller, Kong Chee Khoon, has also unsettled the market, though IOI Corp maintains he left for personal reasons.

3. A client note by Citigroup Research on IOI possibly incurring forex losses of up to RM165 million on its US$1.2 billion bonds might have also spooked investors. It estimated a translation loss of about RM165 million on the company's outstanding Yankee bonds based on the Sept 30 forex rate of RM3.4375.

Due first, in 2011, are its US$370 million exchangeable bonds, of which US$80 million are outstanding. Another US$600 million is due in 2013 and US$500 million guaranteed notes in 2015. The company's current debts amount to about RM6 billion.

4. Trading losses are more of a worry, compounded because the amount is unknown.

5. CPO prices continued to fall steeply in tandem with oil futures for January delivery yesterday dropping to below RM1,400 per tonne — a level that is loss-making for less-productive planters. At this level, the CPO price is less than a third of its peak in March, and earnings of planters are bound to be significantly lower.

6. IOI said this month it was postponing the launch of its Sentosa Cove property projects Seaview and The Pinnacle Collection because of a slump in Singapore real estate.

So, there are a lot of things to worry here. Unrealized loss arising from debts due to volatility is not a major concern to me as it is short-term in nature. In the longer term, volatility will die down after deleveraging dust settle down. However, slower property sales and CPO price free fall are something to worry about - though this business is cyclical in nature. The resource-based manufacturing earning may still be very resilient but it contributed only about 20% for the first six month of 2008. I have confidence IOI will ride out of this but I must differentiate between having faith in the management and not to to get caught in the cross-fire when everybody wants to get out now. Will revisit again when clarity is much improved.