Malaysian financial markets are bracing themselves for the prospect of further pressure on the ringgit after the central bank's shock decision on Friday to severely curtail trading in the currency, which has fallen to its weakest levels in more than a decade.
Bank Negara Malaysia, or BNM as the central bank is known, has come out strongly to reassure markets that the directive to local banks last week to restrict large sell orders on the ringgit was not a prelude to the pegging of the currency.
Private economists and foreign exchange strategists are not convinced and noted that the coming days could see further foreign selling pressure on the ringgit and long-term bonds issued by the Malaysian government.
That, in turn, is likely to spook equity investors on the local stock market, which registered a 1 per cent drop in its benchmark index on Friday.
"We are headed for some rough days and how (Bank) Negara responds will be crucial because last Friday's move was heavy-handed and only sent all the negative signals," said a Singapore-based foreign exchange strategist who tracks the ringgit closely.
Many Asian currencies fell sharply last week after speculation that United States President-elect Donald Trump would adopt policies that would push up US interest rates faster than previously thought.
This sparked a rush among international investors to load up on US dollars, leading to an exodus of funds from emerging markets.
As regional central banks intervened to calm markets, the ringgit was punished the most as traders were reminded that Malaysia could resort to capital controls and peg its currency as it did in 1998, when regional currencies came under heavy speculative attacks from international currency dealers.
Malaysia lifted capital controls in 2005 but BNM allows the ringgit to be traded only onshore.
Local banks, which are heavily regulated by the central bank, determine the currency's spot value.
"The current situation is very regulated and kills the price discovery process of the currency," said a regional foreign exchange strategist in Singapore.
Because there is no offshore trading for the ringgit, international investors use the unofficial non-deliverable forward (NDF) market as a measure to track the movements of the ringgit against other currencies, particularly the US dollar.
Offshore, the ringgit lost as much as 3.7 per cent from the previous close to 4.5395 per US dollar on Friday, its weakest since September 2004.
The sharp fall prompted the Malaysian central bank to slap restrictions on ringgit trades on Friday, which kept the ringgit's spot value barely changed at 4.27 to the US dollar.
In a statement yesterday, BNM said the ringgit remains a non-internationalised currency and any offshore trading of ringgit with trading instruments, such as the NDF, is not recognised.
It also warned Malaysian banks to steer clear of any foreign exchange transaction that could be related to offshore ringgit NDF market activities.
But currency dealers say the Malaysian central bank has no control over NDF trades.
"The question really is how soon will Bank Negara allow market forces to determine the value of the ringgit," said a Malaysian currency dealer, adding that no matter what the Malaysian central bank decides, "we are going to see a lot of volatility in the coming days".
