IT was an odd morning yesterday when the value of the ringgit against the US dollar appeared stuck for some time.
The ringgit, which has been pounded the past couple of days since Donald Trump won the US presidential election, seemingly was not moving up or down. In time, word got around that traders were not providing transaction data or conducting ringgit transactions offshore. Furthermore, the ringgit was trading on a tight band based on a reference price of Thursday’s close against the US dollar.
The uncertainty created much volatility on the ringgit-dollar non-deliverable forward market where the prices swung throughout the day. Foreign investors who have been waiting for a quote on the ringgit were stumped when none was forthcoming after the market opened.
Confusion and the lack of clarity on what the ringgit was trading at sent the spread between the ringgit non-deliverable forward (NDF) market and the spot market further apart to the largest since April 2008, reports say. The value of the ringgit NDF at RM4.54 was the lowest against the US dollar in 12 years.
Furthermore, those wanting the buy physical US dollars from money changers were faced with gyrating and high values.
“The dollar rates changed about four to five times in a day and the spread between the buying and selling price was the widest I have seen,” says a money changer.
For those watching the ringgit’s movement against the US dollar, the fluctuations were causing anxiety.
Deep uncertainty over how US President-elect Donald Trump will act on economic and trade policies, coupled with investors adjusting their portfolios on expectations of US fiscal spending, hit the capital markets of the emerging economies yesterday.
The ringgit at one point slumped to a low of 4.411 against the US dollar in intraday trade and 5.548 against the pound sterling. The ringgit closed at 4.341 to the US dollar yesterday. On Tuesday, it closed at 4.201.
The 10-year Malaysian government securities yields rose to 3.969 from 3.654 on Wednesday, indicating that investors have been selling.
But the ringgit was not the only emerging market currency that felt the brunt of the selldown. The Indonesian rupiah too took a hit with a large fall against the US dollar. Most believe that US interest rates are on the way up as fiscal spending on infrastructure will lift inflation in the US, and interest rates will follow.
With US rates going higher, hot money had chosen to leave emerging markets, hence sending markets and currencies in many emerging markets downwards.
Dealing with NDF market
Bank Negara governor Datuk Muhammad Ibrahim says at a briefing on the country’s third-quarter economic and financial developments that there will be “no pegging” of the ringgit despite the currency’s slump in recent days. “It’s very important to allow the market to decide the level of the ringgit,” he says.
That is the ideal but should markets become volatile, then it is incumbent on the central bank to step in.
“The ringgit should not be determined by speculative positioning and in this respect, the non-delivery forward market is actually made for speculative positioning,” Muhammad says in answer to a question on whether or not the central bank has directed banks to freeze all derivatives and spot transactions in the wake of the ringgit’s slide.
“In some circumstances, the ringgit will be volatile and it is incumbent upon the central bank to basically show its presence in the market by asking banks to price the currency correctly so that it will not be out of sync with the market fundamentals,” he says.
Bank Negara in June announced that it intends to change the US dollar/ringgit reference rate where under the new methodology, the reference rate will be known as Kuala Lumpur USD/MYR Reference Rate.
Bank Negara says it will be published daily at 3:30pm and is computed based on weighted average volume of the interbank USD/MYR FX spot rate transacted by the domestic financial institutions between 8am to 3pm.
“The market transaction data is sourced from online reporting by domestic financial institutions to Bank Negara. The new methodology is more transparent and better reflects underlying trades during the day,” said the central bank in June.
The statement then said that the Kuala Lumpur USD/MYR Reference Rate, which is based on market transaction data rather than submission of quotations by selected banks in the previous methodology, represents comprehensively all interbank FX transactions conducted during the trading period.
“This initiative elevates the USD/MYR FX benchmark rate setting process to global best practices, ensuring that the FX spot reference rate is well received domestically and internationally, contributing to the further development of the Malaysian financial markets,” adds Lee K. Kwan, president of Financial Markets Association of Malaysia, in that statement.
It is clear from the statement that Bank Negara wants the onshore market to have more of a say as to how the ringgit is to be priced.
Whether that has worked is up to debate, as currency expert Suresh Ramanathan says recently in a note that the ringgit, which is facing increasing pressure, faces the risk of wider bid and ask gaps as well as opening levels that are dictated by a NDF level that is pricing in this risk.
The NDF market is a hedging instrument that is a cash-settled, short-term forward contract useful when parties are involved in transactions between a thinly traded or non-convertible currency and a freely traded one in which the profit or loss at the settlement date is calculated by taking the difference between the agreed-upon exchange rate and the spot rate at the time of settlement, for an agreed-upon notional amount of funds. The gain or loss is then settled in the freely traded currency.
However, Muhammad did not say directly whether there was any intervention in the currency markets yesterday, only saying that specifics are not normally revealed.
“We normally deal with individual banks but if there is any policy changes, we will announce it,” he says, adding that the spot rate should not be taken from the NDF market.
The volatility obviously caused much consternation in the markets yesterday. Whether the action by Bank Negara is just for one day or may, left many to wonder just what Monday will look like.
Bank Negara’s Financial Markets Committee (FMC) yesterday issued a statement on what it calls financial market stabilisation measures by saying that with the surge in volatility, the ringgit foreign exchange market has become prone to extreme movements.
“Recent offshore market activities have brought on significant volatility and undue adverse influence on ringgit prices. As the ringgit is a non-internationalised currency, prices should be fully determined by onshore financial market transactions that are driven only by the fundamentals and genuine trade and investment activities in Malaysia,” says assistant governor Adnan Zaylani.
It says Bank Negara is taking measures to ensure the markets do not price ringgit excessively and out of sync, while providing the necessary liquidity in the foreign exchange market.
“The central bank, through the FMC, is also in close engagement with all market participants to update and monitor the market situation. The FMC thus would like to reiterate to market participants that Malaysian financial markets are open to all market participants to facilitate their financial market transactions and capital flows arising from the real economic sectors, trade and investment activities,” it says.