Forwards become Malaysia’s favoured tool for boosting the ringgit

 

Bank Negara Malaysia has increasingly relied on currency forwards to stabilise the ringgit, reducing pressure on its foreign exchange reserves.

PETALING JAYA: The central bank has been increasingly using currency forwards to support the ringgit, easing pressure on its foreign exchange (FX) reserves.

Bank Negara Malaysia’s (BNM) net forward FX position widened to negative US$27.7 billion in April – reflecting a record net short position in its forward books – showing a preference for using this method to bolster its currency. At the same time, its FX reserves are little changed this year.

In recent months, the central bank has been busy propping up the ringgit after the currency tumbled to its weakest since the 1997-98 Asian financial crisis in February on concern over a worsening export outlook.

The ringgit pared losses in March after BNM appealed for state-linked firms to repatriate and convert their foreign investment income, marking it as Asia’s best performer this quarter.

“This net short position in the forward book has been building for years, partially reflecting BNM’s efforts to support the ringgit, and avoids a more obvious drawdown in gross FX reserves,” said Philip McNicholas, Asia sovereign strategist at Robeco Group in Singapore.

“It reflects a worrying focus on the FX level. The ringgit’s proximity to the psychologically important Asian financial crisis lows has, arguably, made this worse.”

While BNM’s net forward FX position has been becoming more negative, the nation’s gross foreign reserves were US$113.6 billion at the end of May, almost unchanged from the end of 2023.

The ringgit is currently trading around 4.7065 per dollar, having strengthened from a 26-year low of 4.8053 set in February.

The central bank’s net short position in its forward book may make the ringgit more vulnerable to a selloff if there’s a sudden bearish shift in global sentiment.

The central bank’s net foreign reserves excluding gold are estimated to be around US$67 billion, well below its short-term external debt of around US$112 billion, based on data compiled by Bloomberg.

“This intimates that the ringgit will likely be extremely sensitive to shifts in risk sentiment and potentially prone to outsized adjustments,” Robeco’s McNicholas said.

Malaysia’s central bank isn’t alone in utilising its forward book to support its currency. The Reserve Bank of India had a net short position in forwards of US$16 billion in April as it sought to support the rupee, according to a research note this month from Bank of America Corp.

BNM’s net forward FX positions at a historical low “will mean USD/MYR will remain more volatile than some of its Asean peers as the capacity to intervene is more limited”, said Claudio Piron, a strategist at Bank of America in Singapore.

However, it doesn’t mean the ringgit is vulnerable to a currency crisis. The ringgit is not overvalued, if anything it is undervalued, and the current account is in surplus, he said. - FMT