‘BNM’s moves will help curb spec­u­la­tion, re­as­sure in­vestors’

The Sun (Malaysia) - - MEDIA & MARKETING - BY EVA YEONG

PETAL­ING JAYA: The re­in­force­ment of for­eign ex­change ad­min­is­tra­tion (FEA) rules by Bank Ne­gara Malaysia (BNM) is ex­pected to dampen spec­u­la­tive ac­tiv­i­ties and pro­vide as­sur­ance to in­vestors.

Sun­way Uni­ver­sity Busi­ness School Pro­fes­sor of Eco­nom­ics Dr Yeah Kim Leng said the move pro­vides as­sur­ance that the on­shore mar­ket re­mains liq­uid and there are suf­fi­cient US dol­lars in the sys­tem for those who are re­vers­ing their in­vest­ments to liq­ui­date their po­si­tion in Malaysia.

“It is quite nat­u­ral for an open econ­omy to have th­ese short-term volatil­i­ties when there is a sharp change in ex­pec­ta­tions es­pe­cially in the US,” he told Sun­Biz.

“There is pos­si­bly some over re­ac­tion but BNM has pro­vided some re­as­sur­ance that the on­shore mar­ket is liq­uid, we have suf­fi­cient liq­uid­ity and that helps to calm the mar­ket,” he said.

How­ever, some volatil­ity will re­main in the mar­ket due to un­cer­tain­ties over pos­si­ble changes in US poli­cies, with greater clar­ity af­ter Pres­i­dent-elect Don­ald Trump takes of­fice in Jan­uary.

“The sharp de­pre­ci­a­tion hap­pened not just to the Malaysian cur­rency but it is also a world­wide phe­nom­e­non whereby all other cur­ren­cies weak­ened against the US dol­lar due to changes in their ex­pec­ta­tions for the US dol­lar, par­tic­u­larly as in­ter­est rates and in­fla­tion ex­pec­ta­tions in the US econ­omy have changed,” said Yeah.

This has led to a sharp out­flow of US cap­i­tal from emerg­ing mar­kets, in­clud­ing, Malaysia, trig­ger­ing strong de­mand for US dol­lars as do­mes­tic and for­eign in­vestors move to hedge their po­si­tions.

“So there is in­creased de­mand for hedg­ing. As a re­sult, the non-de­liv­er­able for­ward (NDF) off­shore mar­ket is sud­denly faced with ex­cess de­mand as ev­ery­one rushes for US dol­lars. That’s why you see a big di­ver­gence be­tween on­shore and off­shore, largely be­cause of very high de­mand for hedg­ing against the US dol­lar,” he said.

Yeah said BNM’s move to re­in­force FEA rules is in re­sponse to the big di­ver­gence be­tween on­shore and off­shore mar­kets, and is more of a pre­ven­tive mea­sure.

SERC Sdn Bhd ex­ec­u­tive di­rec­tor Lee Heng Guie con­curred, say­ing that the sen­ti­ments that put pres­sure on the ring­git con­verged right af­ter Trump won the elec­tion and in­vestors con­tin­ued to price in ex­pec­ta­tions of higher US in­ter­est rates.

“It came at a time when the NDF mar­ket ag­gres­sively priced in ex­pec­ta­tions that the ring­git would go lower. So that cre­ated a very wide di­ver­gence be­tween the NDF rates ver­sus spot rates which prompted BNM to come in to do some in­ter­ven­tion, to make sure that it will not in­vite un­due spec­u­la­tive pres­sure on the ring­git which may desta­bilise the sys­tem or dampen in­vestor sen­ti­ment,” he told Sun­Biz.

He said BNM’s move in re­in­forc­ing FEA rules and dis­pelling ru­mours of cap­i­tal con­trols will help to curb spec­u­la­tion on the ring­git to some ex­tent, al­though cur­rently the cur­rency’s ex­change rate is not re­flec­tive of fun­da­men­tals.

“At this junc­ture, we are in a very com­plex global environment, very sen­si­tive to any pol­icy out­come or pol­icy un­cer­tainty as­so­ci­ated with the ad­vanced econ­omy, in this case it is what’s hap­pen­ing in the US af­ter the elec­tions,” he said.

In or­der to im­prove the out­look for the ring­git, the govern­ment must con­tinue strength­en­ing fun­da­men­tals and tackle vul­ner­a­bil­i­ties such as the fis­cal chal­lenge, govern­ment debt and house­hold debt as well as main­tain the cur­rent ac­count sur­plus.

The ring­git de­pre­ci­ated fur­ther by 1.2% to close at 4.33 against the dol­lar yes­ter­day.

CIMB In­vest­ment Bank Bhd said yes­ter­day the ring­git could touch RM4.50-4.80 against the US dol­lar in the next three to six months as cur­rency volatil­ity could re­main un­til clar­ity on the new US ad­min­is­tra­tion’s eco­nomic and trade poli­cies are made known.

“Be­yond this how­ever, the de­cent fun­da­men­tals of ring­git could pre­vail and the ring­git could re­cover to US pre­elec­tion lev­els,” it said in a re­port.

Hong Leong In­vest­ment Bank Re­search ex­pects the ring­git to see volatile trad­ing with weak­en­ing bias and low­ered its fore­cast to RM4.20-4.50 against the US dol­lar for the rest of 2016 and to RM4.10-4.40 for 2017.


It is nor­mal for open economies to have short-term volatil­i­ties, an economist says.

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