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BNM Says It Will Intervene in Forex Market to Stem Excessive Currency Movements

In an effort to stabilise the ringgit, Bank Negara Malaysia (BNM) on Tuesday (June 27) said it will intervene in the foreign exchange (forex) market to stem currency movements that are deemed excessive.

As the value of the ringgit will continue to remain market-determined, the central bank expects ongoing measures by the government to further strengthen the economy will help to ensure that the ringgit better reflects the country’s fundamentals, said Financial Markets Committee (FMC) and BNM assistant governor Adnan Zaylani.

“While the ringgit continues to be affected by global developments, Malaysia’s expected economic growth in the range of 4%–5%, as well as the structural reforms and fiscal consolidation efforts by the government, are supporting factors for the ringgit,” he said in a statement on Tuesday.

The statement was released after the central bank’s FMC held a meeting to discuss recent developments in financial markets affecting the ringgit exchange rate.

According to the FMC, the external environment continues to be the main factor affecting the ringgit, particularly the evolving market expectation of higher terminal interest rates in most major economies, which in turn raises the risks of a possible marked slowdown in the global economy.

At the same time, the People’s Bank of China had been cutting interest rates, as there were signs that China’s post-Covid-19 economic recovery was losing momentum.

Besides, against the backdrop of US dollar strength, the FMC noted that the extent of the ringgit’s recent depreciation is not reflective of Malaysia’s economic fundamentals.

According to Bloomberg data, the ringgit ended stronger against the US dollar on Tuesday for the second straight day. The ringgit strengthened to 4.6663 against the US dollar, compared with 4.6755 on Monday and last Friday’s 4.6783.

However, year-to-date, the local note has weakened by 5.94% against the US dollar.

The FMC viewed the recent movements in the ringgit exchange rate to be excessive, taking into account a number of factors. The country’s growth momentum is expected to continue in 2023, albeit at a more moderate level, after gross domestic product recorded one of the highest growth rates in the world last year, it said.

“While the strong correlation between the ringgit and renminbi can be explained by the significant trading relationship between Malaysia and China, it is important to note that Malaysia’s external sector remains diversified, both in terms of product segments as well as in terms of trading partners. The FMC observed that this should serve to moderate the close co-movement between the ringgit and the renminbi.

“The FMC noted that while the ringgit volatility has risen consistently with those of regional currencies’, the extent of the volatility increases has been disproportionately higher and deviating from historical relative movements. Notwithstanding this, the onshore financial markets remain on solid footing,” it said.

"Ringgit FX volatility remains the lowest among regional peers. This was underpinned by a healthy increase in daily FX turnover volumes over the past few years, averaging US$15.1 billion (RM17.42 billion) year-to-date.”

Meanwhile, in the bond market, non-resident holdings of Malaysian Government Securities (MGS) bonds have remained close to a longer-term average figure of 23.5%.

“Importantly, MGS continues to offer positive real yield and FMC members noted sustained interest among foreign investors in the Malaysian bond market”, said the FMC.

On top of that, FMC members also discussed observations that corporates and exporters have retained more proceeds in foreign currencies, indicated by rising foreign currency account balances which could potentially lead to imbalance in market flows.

In managing their forex risks, corporates and exporters should be encouraged to take advantage of the attractive level of exchange rate in managing their foreign currency balances, it added.

Source: The Edge Markets

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