The Malaysian ringgit, one of the worst-performing currencies this year, has snapped multi-weeks of new lows against the US dollar to rebound strongly this week. But currency dealers and economists expect the volatility in the local currency market to remain with a bias towards a slight strengthening against the US dollar in the coming months.

After trading between 4.65 and 4.67 against the greenback in recent weeks, the Malaysia unit rebounded strongly on Friday (Jul 14) to 4.52, largely due to developments triggered by the latest US economic data.

“The movements in the local currency market are very externally driven and with the US (Federal Reserve) very likely to shift away from its hawkish monetary stance, the ringgit is likely to strengthen,” said chief economist at Bank Muamalat Mohd Afzanizam Abdul Rashid. He expects the ringgit to strengthen around 4.30 against the US dollar by the year-end.

Over the near term, Kenanga Investment Bank noted in a report to clients on Friday that the Malaysian currency could “trade closer to the psychological threshold of 4.50 against the US dollar” with some expected strengthening of the Chinese yuan.

The decline of the ringgit, which had slid by as much as 5 per cent in the last three months before Friday’s rebound, raised concerns earlier that further tumbles would force the country’s central bank, Bank Negara Malaysia, to intervene more aggressively to defend the ringgit.

Dealers and economists have argued that the ringgit was also being depressed by political concerns ahead of a set of state elections in August, widely viewed as a referendum of Prime Minister Anwar Ibrahim’s government.

Currency dealers said that Bank Negara was already present in the market in recent weeks to lessen volatility in the local market, which directly resulted in the drop in the country’s international reserves.

The central bank’s international reserves stayed in a downtrend for three straight months and declined by US$1.3 billion at end-June to US$111.4 billion, according to official data.

The rebound in the ringgit was also registered with regional currencies. Against the Singapore dollar, the ringgit went up to 3.4374 from Thursday’s close of 3.4553.

While the ringgit’s volatility has been driven by external demand, particularly with interest rate spikes in the US and other markets, currency dealers also argued that the Malaysian currency, which is only traded locally, suffers from regulatory curbs that need to be reviewed to create a more robust market. 

Daily turnover in the interbank and forex market that averaged between US$1.5 billion and US$2 billion six years ago, rarely exceeds US$500 million each trading day currently, noted several currency dealers.

“Controls imposed by the central bank to curb foreign trading of the local currency have sucked out the liquidity, which is the lifeblood for all financial markets,” noted a chief currency dealer in a state-controlled bank, who requested anonymity.  

Foreign investors, who held about half of the outstanding Malaysian government bonds, fled the market in November 2016 when Bank Negara imposed a strict ban on the trading of offshore contracts, known as ringgit non-deliverable forwards (NDFs), to hedge their exposure on the ringgit.

Foreign holdings have been steadily increasing, but they account for about 14 per cent of total outstanding government debt, according to economists.

“The first port of call for foreign investors wanting to pour money into the country is the forex market and we need to make it attractive by generating liquidity. That is the elephant in the room,” said the chief currency dealer.

Source: CNA