Back to the future, round two

The central bank of the United States, the Federal Reserve, stood pat on interest rates last week.  How might this affect the tenge?

The answer depends on how speculators view the foreign-exchange market.  Suppose that they think that the market responds mainly to supply and demand.  Then the tenge should soon stabilize, because nothing has really changed since last week.  Folks still expect the Fed to raise interest rates soon, perhaps when its open markets committee meets October 26-7.  The vice chair of the Fed, Stanley Fischer, a revered macroeconomist, has indicated that the Fed shouldn’t wait until the inflation rate equals its target of 2% before raising interest rates, since the economy needs months or years to adjust to a new policy.  Speculators have already acted on their expectations, driving the exchange rate at some kiosks in Kazakhstan as high as 300 tenge per dollar last week.  (Why?  Because higher US interest rates induce investors to sell assets that pay off in tenge and to buy assets that pay off in dollars.  The fall in demand for tenge-denominated assets reduces demand for the tenge itself, since the assets are priced in tenge.  Thus the tenge weakens relative to the dollar.)  Little remains for speculators to do.

Now suppose that speculators believe that the forex market responds mainly to psychological factors; in particular, that it is prone to fads.  Then a slight depreciation of the tenge may lead to wholesale selling, since every speculator believes that the others will respond to the initial depreciation by dumping their own tenge, regardless of whether these are actually overvalued.  In this case, the tenge may collapse around the time of the next Fed meeting, in response to even trivial statements or events.

Unbelievable

If the National Bank of Kazakhstan was credible, then it could calm the waters by announcing that it would bolster the tenge should it begin to plunge around October 26.  Unfortunately, the operative word in that last sentence is “if.” In less than two years, the National Bank has reneged on its pledges thrice:  In February 2014, when it devalued the tenge 19% after saying it would not; last month, when it put the tenge on a float after saying it would not let it depreciate sharply; and last week, when it intervened in the forex market after saying it would let the market set the exchange rate.  The National Bank now has subzero credibility.  If anything, a vow to intervene may have perverse consequences since speculators may suspect the Bank of a double-cross.

Here’s an example of the Bank’s lack of objectivity.  Last week, it effectively accused the commercial banks in Kazakhstan of currency speculation that had weakened the tenge relative to the dollar.  Leading the list was Halyk Bank, which was said to have sold $58 million worth of tenge on a recent day. 

But as Halyk quickly pointed out, the relevant figure is the sale of tenge net of the sale of dollars.  Even if Halyk sells $1 billion worth of tenge, the currency may strengthen relative to the dollar if the bank also sells $2 billions’ worth of bucks.  As it happens, Halyk’s net sale of tenge was just $12 million. In any event, the bank often buys and sells currency on behalf of its clients rather than for itself.  – Leon Taylor tayloralmaty@gmail.com

Notes

The literal translation of the Russian phrase «Народный банк» is «The People’s Bank,” but the bank is better known by its Kazakh name, Halyk.

References

Панорама.  Нацбанк принимает экстренные меры для стабилизации валютного рынка [Panorama. The National Bank takes urgent steps to stabilize the exchange rate.]  September 18, 2015.  www.panoramakz.com

Панорама.  Народный банк:  «В среду мы продавали доллары наряду с Нацбанком». [Halyk Bank: “On Wednesday we sold dollars along with the National Bank.”]  September 18, 2015.  www.panoramakz.com

Michelle Witte.  Tenge rallies against dollar following National Bank intervention.  Astana Times.  September 21, 2015. www.astanatimes.com