Friday 29 Mar 2024
By
main news image
This article first appeared in The Edge Malaysia Weekly, on November 14 - 20, 2016.

 

FRIDAY morning on Nov 11 wasn’t business as usual for players in Malaysia’s foreign exchange markets.

In the wake of a sharp depreciation in the ringgit/US dollar rate in the offshore market, local money market dealers were apparently told by Bank Negara Malaysia not to quote rates too far above Thursday’s ringgit/US$ close, which was RM4.2802. Bank Negara’s move on Friday morning was primarily to prevent the offshore market from dictating onshore rates.

During the week, the local currency had come under selling pressure as foreign investors sold ringgit assets. Offshore rates traded higher in anticpation of more sell-offs in the weeks ahead,  hitting as high as RM4.600 against the greenback on Thursday and early Friday.

Managing the latest volatility in the domestic financial market is the first big test for Bank Negara Malaysia’s new governor, Datuk Muhammad Ibrahim, since he took the job on May 1. His predecessor, Tan Sri Dr Zeti Akhtar Aziz, retired on April 31.

Market players weren’t too happy with Friday’s chaotic situation in the forex market, especially in the morning trading session. Bank Negara’s “intervention” was a departure from past practice, they say. Previously, to prevent any overly sharp movements in the currency, the central bank would step into the market to buy or sell the ringgit at a certain rate, thus giving market players an indication of pricing levels it wants to see.

Last Friday, bankers were left scratching their heads on how to price the rates, resulting in most banks indicating “unavailable” for most rates on their foreign exchange boards in the morning. And when they came up with the rates, a quick survey showed that the range of the US$/ringgit rates offered were wide, from RM4.2988 to RM4.4340.

In some instances, people in need of US dollars, such as some importers, were left in a bind as banks were not quoting offered rates. In effect, there was very little trading in the ringgit.

While the central bank has taken the right step to ensure that the ringgit did not do a sudden nosedive on Friday, the way it was done could have been better and more transparent.

Indeed, there are some who hold the view that the central bank’s request to banks not to quote too high above Thursday’s RM/US$ closing rate sparked a mild panic in the market, and even talk of capital controls.

The offshore market, mainly Singapore, has been in existence for a long time and the divergence in ringgit/US$ rates has, more often than not, been narrow.

As the markets closed on Friday, market players say they are looking to see how things will unfold next week. Expectations are the market will continue to see foreign investors disposing of their holdings of MGS, thus putting the ringgit under more downward pressure.

And, like it or not, the offshore market will continue to have a bearing on where the ringgit is headed, more so when pricing transparency onshore has hit a bump.

Macro-economic and monetary policy management, going forward, will likely be even more challenging for the central bank. More so if the ringgit’s weakness continues to worsen.

Although Malaysia’s economy performed slightly better in the third quarter of this year, indications are the coming months will be a rough ride. Latest data showed the country’s gross domestic product (GDP) grew 4.3% in 3Q2016, up from 4% in the preceding quarter.

GDP growth is projected at between 4% and 4.5% for 2017, but increasingly, a view is that the impact of a weakening ringgit and rising cost of living, combined with continued uncertainly in the global economy, will be bigger than expected in the coming months.

With the ringgit on a weakening trend, the central bank may not have much room to manoeuvre interest rates. Some economists have talked about a rate cut by year-end or early next year, but the latest fall in the ringgit would have put the central bank in a quandary. If it lowers interest rates to boost growth, the ringgit will suffer even more. If it raises rates to shore up the ringgit, growth could be impeded.

Muhammad is not new to central banking — he has been with the central bank since 1984, rising from the ranks and in the course of his career, headed important units such as bank regulation and supervision as well as treasury and financial markets. But he is new at the helm, and the markets are watching to see how he will steer the ship, going forward. The big test came last week, and going by indications, there will certainly be more to come.

 

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.

      Print
      Text Size
      Share