KUALA LUMPUR: The announcement by Malaysia's central bank that it would allow offshore settlement in ringgit of trade in goods and services triggered speculation that Bank Negara Malaysia (BNM) may allow offshore trade in its currency.
After Wednesday's announcement, one month ringgit non-deliverable forwards (NDFs) traded at 3.1250-3.1510 on very high volume in overnight trade, according to dealers. That compared with 3.1600-3.1680 prior to the change in settlement and borrowing rules.
Below are some questions and answers about the implications of the move and possible further developments.
Is it a prelude to allowing the ringgit to trade overseas?
Unlikely. BNM is still wary of the destabilising effect of volatile portfolio inflows and outflows. Wednesday's move fits in with a pattern of reducing costs for Malaysian importers and exporters and came in tandem with a move to settle yuan-ringgit trade in China. This means that importers and exporters will not have to calculate a price by converting say yuan into dollars and dollars into ringgit. It will result in some cost savings.
Any move to internationalise the ringgit, such as allowing the currency to trade outside of the country, would require the approval of the government as well as the central bank. Prime Minister Datuk Seri Najib Razak's government has made some modest changes to improve Malaysia's investment climate but a move such as this would be likely be too radical for the government.
What does BNM aim to do on ringgit?
Central bank governor Tan Sri Dr Zeti Akhtar Aziz has repeatedly said BNM does not intervene to influence the direction of ringgit trade, but to smooth its path. She also said in a recent interview that the bank's currency regime had "served us very well".
In reality traders and economists say the central bank has intervened less and recently made a decision not to stand in the way of ringgit appreciation. The currency is up 9.36% this year against the dollar, making it Asia's best performer.
What is driving the ringgit rally?
The gains are in part due to the ringgit, or more accurately Malaysia's huge and liquid bond market, being viewed as a proxy for yuan revaluation. The attractiveness of the ringgit has been bolstered by BNM's cumulative 75 basis points of rate hikes this year. The increases, which came ahead of most Asian central bank's moves to tighten have taken its key policy rate to 2.75%.
The ringgit has also been bolstered by a recovery in economic growth which saw first quarter gross domestic product (GDP) rise 10.1% from a year ago and second quarter data released on Wednesday showed a better-than-expected 8.9% gain.
The ringgit was a massive underperformer in 2009 gaining just 0.85% and underperforming virtually every other Asian currency.
Is the rally sustainable?
Despite the gains in the currency and in the bond market that has seen portfolio inflows in the first half totaling RM10.4 billion, flows into other assets have been limited.
Malaysia's stock market has seen little foreign inflows with overseas ownership levels standing where they were a year ago at less than 21% of market capitalisation.
Direct investment outflows have been recorded through 2008 and 2009 and in the first half of the year were just RM2 billion. According to UN data, foreign direct investment flows into Malaysia were the lowest in Southeast Asia in 2009.
The prospect of further rate hikes could further boost the ringgit. However most economists say BNM is probably done this year.
There are just five basis points of further rate increases priced in by November by markets with the three-month KLIBOR quoted at 2.92% and the 3-month rates swap on a contract starting after three months at 2.97%.
There have been fears Malaysian exporters could be hit by a stronger ringgit but both the government and the central bank have said they are not concerned. Given that Malaysia imports and re-exports in the key electronics field it will benefit to some extent from the stronger ringgit as the cost of inputs will fall.
Areas like palm oil however could suffer. Malaysia is the world's second largest producer, and a rising ringgit increases the cost of palm oil relative to alternatives. ' Reuters
After Wednesday's announcement, one month ringgit non-deliverable forwards (NDFs) traded at 3.1250-3.1510 on very high volume in overnight trade, according to dealers. That compared with 3.1600-3.1680 prior to the change in settlement and borrowing rules.
Below are some questions and answers about the implications of the move and possible further developments.
Is it a prelude to allowing the ringgit to trade overseas?
Unlikely. BNM is still wary of the destabilising effect of volatile portfolio inflows and outflows. Wednesday's move fits in with a pattern of reducing costs for Malaysian importers and exporters and came in tandem with a move to settle yuan-ringgit trade in China. This means that importers and exporters will not have to calculate a price by converting say yuan into dollars and dollars into ringgit. It will result in some cost savings.
Any move to internationalise the ringgit, such as allowing the currency to trade outside of the country, would require the approval of the government as well as the central bank. Prime Minister Datuk Seri Najib Razak's government has made some modest changes to improve Malaysia's investment climate but a move such as this would be likely be too radical for the government.
What does BNM aim to do on ringgit?
Central bank governor Tan Sri Dr Zeti Akhtar Aziz has repeatedly said BNM does not intervene to influence the direction of ringgit trade, but to smooth its path. She also said in a recent interview that the bank's currency regime had "served us very well".
In reality traders and economists say the central bank has intervened less and recently made a decision not to stand in the way of ringgit appreciation. The currency is up 9.36% this year against the dollar, making it Asia's best performer.
What is driving the ringgit rally?
The gains are in part due to the ringgit, or more accurately Malaysia's huge and liquid bond market, being viewed as a proxy for yuan revaluation. The attractiveness of the ringgit has been bolstered by BNM's cumulative 75 basis points of rate hikes this year. The increases, which came ahead of most Asian central bank's moves to tighten have taken its key policy rate to 2.75%.
The ringgit has also been bolstered by a recovery in economic growth which saw first quarter gross domestic product (GDP) rise 10.1% from a year ago and second quarter data released on Wednesday showed a better-than-expected 8.9% gain.
The ringgit was a massive underperformer in 2009 gaining just 0.85% and underperforming virtually every other Asian currency.
Is the rally sustainable?
Despite the gains in the currency and in the bond market that has seen portfolio inflows in the first half totaling RM10.4 billion, flows into other assets have been limited.
Malaysia's stock market has seen little foreign inflows with overseas ownership levels standing where they were a year ago at less than 21% of market capitalisation.
Direct investment outflows have been recorded through 2008 and 2009 and in the first half of the year were just RM2 billion. According to UN data, foreign direct investment flows into Malaysia were the lowest in Southeast Asia in 2009.
The prospect of further rate hikes could further boost the ringgit. However most economists say BNM is probably done this year.
There are just five basis points of further rate increases priced in by November by markets with the three-month KLIBOR quoted at 2.92% and the 3-month rates swap on a contract starting after three months at 2.97%.
There have been fears Malaysian exporters could be hit by a stronger ringgit but both the government and the central bank have said they are not concerned. Given that Malaysia imports and re-exports in the key electronics field it will benefit to some extent from the stronger ringgit as the cost of inputs will fall.
Areas like palm oil however could suffer. Malaysia is the world's second largest producer, and a rising ringgit increases the cost of palm oil relative to alternatives. ' Reuters
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