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Bank Negara Takes On Currency Speculators

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KUALA LUMPUR: In a bid to stabilise the volatile ringgit, Bank Negara is expected to maintain precautionary measures to ensure proper price discovery.

The central bank will also curb speculative activity in the offshore market which has driven the currency far off from its fundamentals.

It is learnt that banks have been told to disclose price quotes as soon as currency trading begins today to facilitate orderly trading and prevent a recurrence of last Friday when they were unable to disclose foreign exchange prices for a large part of the day.

However, there will be close scrutiny to ensure there is no abuse of the US dollar-ringgit transactions. Towards this end, the central bank said in a statement yesterday that banks must not facilitate trades that could be related to offshore ringgit market activities which it does not recognise.

The central bank had assured that it would provide liquidity in the currency markets if necessary.

“The Malaysian foreign exchange (FX) market remains open and Bank Negara stands ready to provide liquidity if necessary to ensure orderly market. Malaysia continues to welcome real investments and provide all avenues for FX transactions and hedging requirements onshore,” it said in a statement.

This is expected to provide relief for those having apprehensions on US dollar transactions done.

According to several currency dealers, there was confusion last Friday as local banks were told by the central bank to follow last Thursday’s onshore closing rates of RM4.29 in their transactions. Only very late in day was the exchange rate fixed at RM4.34 against the dollar.

Additionally, banks were also told not to provide US dollar-ringgit quotes to their offshore counterparts, something that added to the confusion. It led to to very little US dollar-ringgit trades done last Friday.

It is learnt that the restrictions by Bank Negara came after it saw high volatility in the US dollar-ringgit exchange rate in the offshore market that is known as the ringgit non-deliverable forward (NDF) market.

Dealers tend to observe the offshore rates in the early trading session for clues on how to price the US dollar against the ringgit until the official exchange rate is published by 3:30pm. Offshore US dollar-ringgit rates, as indicated by the one-month ringgit NDF, went as high as RM4.535 against the dollar before settling down at RM4.4865.

The figure represented a large spread over onshore rates, which were the official rates – priced at RM4.3418 against the dollar last Friday.

Governor Datuk Muhammad Ibrahim had reiterated that there would be no pegging of the ringgit and stressed that the currency’s pricing should not be influenced by speculative positioning in the NDF market.

For the past two years, the ringgit had been weaker against the US dollar in the offshore market compared with the onshore market, indicating bearish sentiment going forward.

However the ringgit is not the only emerging market currency that had come under pressure.

Currency markets across the globe were hit hard last Friday by the sudden appreciation in the US dollar which triggered a major sell-off in the emerging markets.

On the same day, the rupiah fell to a five-year low as its central bank was forced to intervene in the markets. Meanwhile, the People’s Bank of China set its reference rate for the yuan at a lower rate of 6.8115 versus the dollar, the lowest in more than six years.

The global sell-off across asset classes in emerging markets was an immediate reaction to Donald Trump’s shock win during the Nov 8 US presidential race.

Trump planned a US$1 trillion spending on infrastructure – something the president-elect felt would create thousands of new jobs and result in a revival of the US economy.

The measures are expected to increase inflation in the coming years forcing the US Federal Reserve to raise interest rates.

The prospects of such an event were priced in by investors who sold US Treasury bonds throughout last week. The yield on the benchmark bond rose to 2.15%, or a large move of more than 40 basis points in the two days following the election results.

Closer to home, yields on the 10-year Malaysian Government Securities rose to 3.94% last Friday, or a move of 27 basis points in just two days.

“The ringgit and other emerging market currencies will continue to play hostage towards the US dollar strength and rising US rates as the market digests Trump’s speeches and actions.

“Ultimately the onus would be on global central banks to respond to the threat posed on their currencies as the year draws to a close and market liquidity worsens,” according to Affin Hwang Research in a Nov 11 note.

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