Bank Negara to stem excessive currency movements in forex market

 

Bank Negara, as per its statutory mandate, will intervene in the foreign exchange market to stem currency movements that are deemed excessive, said assistant governor Adnan Zaylani.

He said while the value of the ringgit will continue to remain market-determined, the central bank expects ongoing measures by the government to further strengthen the economy would ensure the ringgit better reflects the country’s fundamentals.

“The ringgit continues to be affected by global developments, however, Malaysia’s expected economic growth in the range of four to five percent, structural reforms and fiscal consolidation efforts by the government are supporting factors for the ringgit,” said Adnan, who is also the Financial Markets Committee (FMC) chairperson.

In a statement today, in conjunction with an FMC meeting to discuss recent financial market developments affecting the ringgit exchange rate, he said FMC members also discussed observations that corporates and exporters have retained more proceeds in foreign currencies, indicated by rising foreign currency account balances which could potentially lead to an imbalance in market flows.

In managing their forex risks, corporates and exporters should be encouraged to take advantage of the attractive level of exchange rates to optimise their foreign currency balances, Adnan noted.

Meanwhile, Financial Markets Association of Malaysia (FMAM) president Chu Kok Wei said financial markets in Malaysia continue to operate in an orderly manner and remain conducive to carrying out clients’ needs.

“We welcome Bank Negara’s guidance on the ringgit and recent market developments. We will remain supportive of its efforts in domestic markets,” he said.

In addition to Malaysia’s strong economic fundamentals, the FMC is of the opinion that further clarity on the United States Federal Reserve’s terminal rate and possible positive signs from stimulus measures out of China may provide support to the ringgit and Asian currencies in general.

A recent forecast by analysts and economists continues to point to broad-based recovery against the US dollar by the end of the year, at an average of 4.56 versus the dollar in the third quarter and 4.50 in the fourth quarter.

Ringgit does not reflect economic fundamentals

As for the assessment of the ringgit, Bank Negara said the external environment continues to be the main driver of the local note’s performance, particularly the evolving market expectations of higher terminal interest rates in most major economies, which in turn, raises risks of a possible marked slowdown in the global economy.

At the same time, the People’s Bank of China has lowered interest rates amidst signs that China’s post-Covid economic recovery is losing its momentum.

The ringgit, along with other regional currencies, has been weighed down by these developments.

Against the backdrop of the US dollar’s strength, the FMC observed that the extent of the recent depreciation of the ringgit is not reflective of Malaysia’s economic fundamentals.

The FMC viewed recent movements in the ringgit exchange rate to be excessive considering the following factors:

i. After recording one of the highest gross domestic product growth rates in the world in 2022, Malaysia’s growth momentum is expected to continue in 2023 albeit at a more moderate level, supported by continued domestic investment activity, improving labour market conditions and higher tourism activities.

Malaysia’s broad and diversified economic structure is expected to cushion the impact of slowing global growth.

ii. While the strong correlation between the ringgit and the renminbi can be explained by the significant trading relationship between Malaysia and China, it is important to note that Malaysia’s external sector remains diversified, both in terms of product segments as well as in terms of trading partners.

The FMC observed that this should serve to moderate the close co-movement between the ringgit and the renminbi.

iii. The FMC noted that while the ringgit volatility has risen consistently with those of regional currencies, the extent of the volatility increases has been disproportionately higher and deviating from historical relative movements.

Notwithstanding this, the onshore financial markets remain on solid footing. Ringgit forex volatility remains the lowest among regional peers. This was underpinned by a healthy increase in daily forex turnover volumes over the past few years, averaging US$15.1 billion (US$1=RM4.67) year-to-date.

iv. In the bond market, non-resident holdings of Malaysian Government Securities (MGS) bonds have remained close to the longer-term average figure of 23.5 percent.

Importantly, MGS continues to offer positive real yield and FMC members noted sustained interest among foreign investors in the Malaysian bond market.

- Bernama