Ringgit a casualty of Singapore’s surprise monetary stance

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ringgit-weakened-to-sgd_10_1063AS Singaporeans cleaned out the ringgit at their neighbourhood money changers after exchange rates for the currency pair fell to record lows mid-week, Bank Negara Malaysia swooped in behind the scenes to restore order, financial executives say.

The sudden ringgit weakness to as low as RM2.7317 to the Singapore dollar intra-week is owed, in part, to the latter’s strength.

The Singapore dollar strengthened after the city state’s central bank, the Monetary Authority of Singapore (MAS), on Tuesday surprisingly held back on further monetary easing and maintained its policy of a “modest and gradual” appreciation of the Singapore dollar. It was a different surprise in January when MAS unexpectedly reduced the slope of its currency band, resulting in the Singapore dollar falling to a four-year low versus the greenback. MAS, which uses the exchange rate rather than interest rates to tackle inflation, then cited falling inflation from lower oil prices.

The ringgit, which opened at RM2.7015 to the Singapore dollar last Tuesday, slipped 0.58% to RM2.7292 intraday on the same day before closing at RM2.7145. The weakness resumed on Wednesday, with the ringgit skidding another 0.58% against the Singapore dollar to RM2.7303 intraday before closing at RM2.7225, Bloomberg data showed.

By Thursday, however, the ringgit hit RM2.7317 momentarily but was noticeably stronger as it closed at RM3.6995 to the Singapore dollar. The strength was even more apparent by midday Friday.

Some money market dealers attribute the rebound partly to Bank Negara stepping in to provide support for the ringgit. “The central bank is believed to have stepped in Thursday to sell a fair bit of the Singapore dollar,” a dealer with a local bank says.

It is not unusual for the central bank to step in to stabilise the currency. It has done so in the past whenever needed, not to reverse a trend but to prevent huge volatile swings.

Even so, the ringgit’s rebound on Thursday and Friday was also attributed to other factors, like firmer Brent crude oil prices.

“Firmer Brent prices helped [the ringgit]. I cannot say 100% there was Bank Negara intervention but we reckon there are interests to buy SGD/MYR on dips … the USD/MYR also gapped lower on USD pullback [weakness after US Fed held back on a rate hike],” a local analyst says.

“For the SGD/MYR, there is the view that RM2.70 is one hurdle. As for USD/MYR, the figure is RM3.80 [that the ringgit was once pegged to the USD] but we’re possibly looking at new equilibriums. So, honestly, who really knows for certain,” he adds, recounting the heightened volatility of the forex market that has caused sizeable trading losses at even mega global banks like Citigroup Inc.

Incidentally, Malaysia on Wednesday (April 15) sold US$1.5 billion of 10-year and 30-year dollar Islamic sukuk for smaller than targeted yield spreads over US Treasury, after reportedly receiving over US$9 billion worth of orders. The 10-year Islamic papers were sold at 3.04% and the 30-year bonds at 4.24%. “That’s a good piece of news for Malaysia, which needs the boost with all that negative publicity on 1MDB (1Malaysia Development Board Bhd) and a possible Fitch ratings downgrade by June,” one observer says.

As it is, the ringgit’s decline against the US dollar since September 2014 on the back of tumbling oil prices, has caused Bank Negara Malaysia’s foreign reserves to fall US$26.94 billion over seven months from US$132.04 billion in August 2014 to US$105.1 billion in March 2015.

The ringgit has weakened about 7% against the Singapore dollar since late-August 2014.

 

This article first appeared in The Edge Malaysia Weekly, on April 20 - 26, 2015.