Bank Negara moves will help curb speculation, reassure investors: Economists

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 pre-election 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.