Bank Negara discouraging forex traders from transactions that would weaken the ringgit

As the downward pressure on the ringgit mounts, Bank Negara has adopted gentle suasion methods to stem the decline.
As the downward pressure on the ringgit mounts, Bank Negara has adopted gentle suasion methods to stem the decline.PHOTO: BLOOMBERG

PETALING JAYA (THE STAR ONLINE/ASIA NEW NETWORK): As the downward pressure on the ringgit mounts, Bank Negara has adopted gentle suasion methods to stem the decline.

Senior executives of the central bank have had briefings with foreign exchange dealers from local and foreign financial institutions this week discouraging them from entering into transactions that result in selling the ringgit.

This comes as dealers get offers to enter into a "put" option for the ringgit at four to the US dollar over a period of between three and six months.

What this effectively means is that the counter party has taken the view that the ringgit will go to RM4 against the US dollar in three months and is prepared to take delivery from the dealer at that price when the time comes.

"If the ringgit hits RM4 against the US dollar, a lot of dealers stand to make a lot of money," said a currency strategist.

The appeal by Bank Negara is part of a measure to defend the ringgit, which slid to a fresh 17-year low on Thursday as a political storm intensified over the finances of debt-ridden 1Malaysia Development Bhd. and Prime Minister Najib Razak.

The currency hit an intraday low of 3.828 against the US dollar on Thursday, before settling at 3.8190. It was little changed on Friday morning.

Dealers told The Star that the central bank had in a recent briefing with them reiterated its stand that the ringgit would not be pegged against the US dollar, and that its value would be determined largely by market forces. Bank Negara had, however, expressed its concern that the ringgit had weakened far beyond Malaysia's economic fundamentals.

Given the prevailing global economic conditions, the central bank argued that the "fair value" of the ringgit should be around 3.65 against the US dollar, according to dealers who had attended the briefing with Bank Negara.

Year-to-date, the ringgit has lost about 8.4 per cent against the US dollar, making it the worst-performing currency in Asia.

With Malaysia's forex reserves on a declining trend, currency strategists said it was not surprising that Bank Negara would resort to other measures such as appealing to dealers to support the ringgit.

Malaysia's currency reserves fell US$5 billion in the two weeks to July 5 as the central bank defended the ringgit and analysts estimate a lot more could have been spent since as the political storm around Mr Najib intensified.

"The significant decline in foreign reserves has put a constraint on Bank Negara's initiative to defend the ringgit, hence the central bank will have to adopt other means to double up the effort," Saktiandi Supaat, head of forex research at Malayan Banking Bhd in Singapore, said over the phone.

The pressure on the ringgit is compounded by ann impending US interest rate hike, which has been causing massive capital outflows from emerging economies like Malaysia, and the country's exposure to weak commodity prices such as that for crude oil, liquefied natural gas and crude palm oil.

Reuters recently quoted Chua Hak Bin, Singapore-based head of emerging Asia economics at Bank of America Merrill Lynch, as saying that the ringgit could weaken to 3.86 by end-2015 and 4.05 by end-2016 against the US dollar.

"You can try to stabilise the ringgit, but ultimately, I don't think it can stand the correction. They will have to adjust to whatever new equilibrium," Mr Chua had told the newswire.