Bank Negara stemming the decline of the ringgit

Dealers told StarBiz that the central bank had in a recent briefing with them reiterated its stand that the ringgit would not be pegged against the US dollar, and that its value would be determined largely by market forces. Bank Negara had, however, expressed its concern that the ringgit had weakened far beyond Malaysia

PETALING JAYA: As the downward pressure on the ringgit mounts, Bank Negara has adopted gentle suasion methods to stem the decline.

Senior executives of the central bank have had briefings with foreign exchange (forex) dealers from local and foreign financial institutions this week discouraging them from entering into transactions that result in selling the ringgit.

This comes as dealers get offers to enter into a “put” option for the ringgit at four to the US dollar over a period of between three and six months.

What this effectively means is that the counter party has taken the view that the ringgit will go to RM4 against the US dollar in three months and is prepared to take delivery from the dealer at that price when the time comes.

“If the ringgit hits RM4 against the US dollar, a lot of dealers stand to make a lot of money,” said a currency strategist.

The appeal by Bank Negara is part of a measure to defend the ringgit, which slid to fresh 17-year lows against the US dollar yesterday.

Dealers told StarBiz that the central bank had in a recent briefing with them reiterated its stand that the ringgit would not be pegged against the US dollar, and that its value would be determined largely by market forces. Bank Negara had, however, expressed its concern that the ringgit had weakened far beyond Malaysia’s economic fundamentals.

Given the prevailing global economic conditions, the central bank argued that the “fair value” of the ringgit should be around 3.65 against the US dollar, according to dealers who had attended the briefing with Bank Negara.

The ringgit hit a fresh 17-year low of 3.8288 against the US dollar in intra-day trade yesterday before settling at 3.8190 against the greenback at the close. That represented a depreciation of about 0.23% from the closing value of 3.8103 on Wednesday.

Year-to-date, the ringgit has lost about 8.4% against the US dollar, making it the worst-performing currency in Asia.

But there are other currencies such as the Australian and New Zealand dollars that have depreciated by 11% and 15%, respectively, against the US dollar since January this year.

Bank Negara is seen to have been intervening in the forex market to stem the decline of the ringgit in recent months based on the significant decline in the country’s forex reserves.

As of July 15, Malaysia’s international reserves, that comprise the forex reserves, standard drawing rights and gold reserves, stood at a five-year low of US$100.5bil (RM384.3bil), down from US$105.5bil as at end-June.

The forex reserves are now at US$92bil versus US$120.3bil a year ago. Then, the international reserves were at US$131.9bil.

With Malaysia’s forex reserves on a declining trend, currency strategists said it was not surprising that Bank Negara would resort to other measures such as appealing to dealers to support the ringgit.

“The significant decline in foreign reserves has put a constraint on Bank Negara’s initiative to defend the ringgit, hence the central bank will have to adopt other means to double up the effort,” Saktiandi Supaat, head of forex research at Malayan Banking Bhd in Singapore, said over the phone.

Saktiandi said he forecast the lowest the ringgit could go would be 3.85 against the US dollar.

“But we still think the ringgit’s exchange rate would average at 3.82 against the greenback in the current quarter, before strengthening to 3.78 in the fourth quarter of the year,” he said.

The downward pressure on the ringgit remained strong due to a combination of external and domestic uncertainties. Externally, the impending US interest rate hike has been causing massive capital outflows from emerging economies, including Malaysia.

The pressure on the ringgit is compounded by Malaysia’s exposure to weak commodity prices such as that for crude oil, liquefied natural gas and crude palm oil, as well as renewed domestic political uncertainties and the scandal involving state investment fund 1Malaysia Development Bhd.

So far, in Malaysia, foreign capital outflow has been more prevalent in the equities market, while foreign holdings in domestic bonds have been relatively steady.

“The key to watch now is the potential outflow from ringgit-denominated bonds,” Andy Ji, a currency strategist at the Commonwealth Bank of Australia in Singapore, said.

Ji noted that there could be a significant negative impact on the ringgit if outflows happened in the local currency bond market due to the high foreign shareholdings in Malaysian Government Securities.

Reuters recently quoted Chua Hak Bin, Singapore-based head of emerging Asia economics at Bank of America Merrill Lynch, as saying that the ringgit could weaken to 3.86 by end-2015 and 4.05 by end-2016 against the dollar.

“You can try to stabilise the ringgit, but ultimately, I don’t think it can stand the correction. They will have to adjust to whatever new equilibrium,” Chua had told the newswire.