BNM to intervene in forex market

The Malaysian ringgit has attracted significant attention in recent times, particularly as the Singaporean dollar reached its highest level ever against the ringgit in late May. This development quickly became a topic of conversation at social gatherings and drew interest in the upcoming state elections, where the value of the national currency holds potential significance.

Against this backdrop, on June 27, the central bank surprised the market with a statement issued by the Financial Markets Committee (FMC). The FMC was established by Bank Negara Malaysia (BNM) in 2016 and comprises representatives from various financial institutions, corporations, and service providers that play prominent roles in the financial markets.

Through the FMC's statement, Bank Negara Malaysia seeks to address the evolving dynamics of the currency and its impact on the financial markets, demonstrating its commitment to maintaining stability and promoting effective market participation.

In line with its legal responsibilities, Bank Negara Malaysia (BNM) has affirmed its commitment to intervene in the foreign exchange (forex) market to address excessive currency movements. Adnan Zaylani, the assistant governor of BNM and chairman of the Financial Markets Committee (FMC), emphasized this stance in the statement. Adnan serves as the central bank's key representative on matters related to the ringgit.

The FMC, as stated in the release, convened a meeting on the same day to discuss recent developments in the financial markets that have impacted the exchange rate of the ringgit. The committee acknowledged that the external environment remains the primary driver influencing the performance of the ringgit, particularly as market expectations of higher terminal interest rates in major economies evolve. These expectations also raise concerns about the potential for a significant global economic slowdown.

Through these statements, the FMC highlights its proactive approach in addressing currency fluctuations, while recognizing the importance of external factors and their potential impact on the ringgit's value and the broader economy.

Furthermore, the FMC acknowledged that the People's Bank of China (PBoC) has taken measures to lower interest rates, indicating a potential slowdown in China's economic recovery following the Covid-19 pandemic. As a result, the ringgit, along with other currencies in the region, has faced downward pressure.

In the context of a strong US dollar, the FMC noted that the recent depreciation of the ringgit does not align with Malaysia's underlying economic fundamentals. This suggests that external factors have played a significant role in shaping the currency's performance.

1. The FMC expressed its view that the recent fluctuations in the ringgit exchange rate were excessive and provided five reasons to support this perspective:

2. Malaysia's robust economic growth in 2022, one of the highest in the world, is expected to continue in 2023, albeit at a more moderate pace. This growth will be fueled by sustained domestic investments, improving labor market conditions, and increased tourism activities. Malaysia's diverse and resilient economy is well-positioned to mitigate the impact of global economic slowdown.

3. While the ringgit's correlation with the yuan is influenced by the strong trading relationship between Malaysia and China, it is important to note that Malaysia's external sector remains diversified in terms of product segments and trading partners. The FMC emphasized that this diversification should moderate the close co-movement between the ringgit and yuan.

4. The FMC observed that while the ringgit's volatility has increased in line with other regional currencies, the magnitude of these volatility increases has been disproportionately higher, deviating from historical patterns. However, the onshore financial markets remain stable, with ringgit forex volatility ranking lower compared to its regional counterparts. The FMC highlighted the healthy growth in daily forex turnover volumes, averaging US$15.1 billion (RM70.37 billion) year-to-date.

5. In the bond market, non-resident holdings of Malaysian Government Securities (MGS) bonds have remained close to the long-term average of 23.5%. It is noteworthy that MGS bonds continue to offer positive real yield, attracting sustained interest from foreign investors in the Malaysian bond market.

Looking ahead, the FMC believes that besides Malaysia's strong economic fundamentals, further clarity on the US Federal Reserve's terminal rate and positive signals from stimulus measures in China could potentially provide support to the ringgit and Asian currencies in general.

According to the FMC, current projections from analysts and economists suggest a widespread recovery of the ringgit against the US dollar by the end of the year.

Furthermore, during the meeting, FMC members discussed their observations regarding corporates and exporters holding larger amounts of foreign currencies, as indicated by the increasing balances in foreign currency accounts. This trend could potentially result in imbalances in market flows.

The FMC encourages corporates and exporters to seize the opportunity of the favorable exchange rate to effectively manage their forex risks and optimize their foreign currency balances.

Despite the impact of global developments on the ringgit, Malaysia's projected economic growth of 4%-5% and the government's commitment to structural reforms and fiscal consolidation serve as supportive factors for the ringgit.

While the value of the ringgit remains subject to market forces, the central bank expects that the government's ongoing efforts to strengthen the economy will contribute to a more accurate reflection of the country's fundamentals, as stated by Adnan.

Chu Kok Wei, President of the Financial Markets Association of Malaysia (FMAM) and co-CEO for Group Wholesale Banking at CIMB Group, expressed his confidence in the orderly operation of financial markets in Malaysia and their ability to meet clients' requirements.

“We appreciate the guidance provided by BNM regarding the ringgit and the recent developments in the market. We are committed to supporting BNM's initiatives in the domestic markets,” stated Chu.