Central bank: Forex market more efficient now

PETALING JAYA: Bank Negara says there are encouraging signs of improvement in the balance of demand and supply of foreign currency that has resulted in a more efficient foreign-exchange (forex) market.

This is following the implementation of several initiatives, including the requirement that exporters convert 75% of their earnings back to ringgit.

According to Bank Negara, net export proceeds forex conversion has recorded a cumulative amount of US$8.8bil (RM35.9bil) since December 2016. This compares with negative US$500mil between January and November last year.

The ringgit strengthened 10.1% in 2017 and traded within the range of 4.05 to 4.09 against the US dollar in December.

The exchange rate remained stable with the US dollar-to-ringgit one-month implied volatility at an average of 4.5% this year.

“Liquidity has also improved in the onshore market and is able to meet the hedging needs of both residents and non-residents,” Bank Negara said in a statement.

The central bank noted that the onshore forex market in 2017 sustained a daily average volume of US$9.9bil compared to US$8.1bil in 2016. Of this, forward and swap transactions recorded an average of US$3.8bil daily.

“With the improvement in liquidity, the average US dollar-to-ringgit bid-ask spread recorded a lower average of 24 points, relative to spreads of 46 points in 2016,” it said.

“Currently, pricing in the onshore market is driven by real sector activities rather than speculative transactions,” it added.

Bank Negara pointed out that the onshore forex market volumes were now primarily comprised of real sector trade flows, which account for more than 50% of the total volume.

At the same time, the share of non-resident portfolio flows has decreased to less than a quarter.