Malaysia’s ringgit plunged to its weakest in more than 12 years in offshore markets on Friday as investors dumped government bonds, forcing the central bank to use its persuasive powers to keep the spot rate steady by deterring sellers onshore.
As the currency slumped offshore, Bank Negara Malaysia governor Muhammad Ibrahim unveiled better than expected third quarter economic growth and current account data, and said the ringgit should not be priced out of sync with fundamentals.
“The situation now is result of speculative positioning… We don’t want to be dictated by factors that have nothing to do with the country’s fundamentals,” Ibrahim told a news conference.
Those fundamentals include an economy that grew 4.3 percent in the third quarter, accelerating after five straight quarters of decline, and a current account surplus that widened to 6 billion ringgit ($1.4 billion) in the third quarter, from 1.9 billion ringgit in the previous quarter.
Malaysia was not alone as other emerging Asian currencies and bonds lost ground too. Investors fear capital outflows from the region once Donald Trump assumes the presidency as he is expected to adopt policies that are likely to increase U.S. interest rates faster than previously thought.
The ringgit’s one-month non-deliverable forwards (NDFs) lost as much as 3.7 percent from the previous close to 4.5395 per dollar, its weakest since at least September 2004, according to Thomson Reuters data.
By contrast, the ringgit spot barely moved at 4.27 per dollar with liquidity extremely thin.
As a result, the dollar/ringgit’s NDFs premium over the dollar/ringgit spot increased to 0.2695, the widest since at least April 2008, according to Reuters data.
(A non-deliverable forward (NDF) is a cash-settled, short-term forward contract in a thinly traded or nonconvertible foreign currency against a freely traded currency. The profit or loss at the settlement date is calculated by taking the difference between the agreed upon exchange rate and the spot rate at the time of settlement, for an agreed upon notional amount of funds. The gain or loss is then settled in the freely traded currency.)
Traders in Kuala Lumpur said the central bank told big investors that they will allow spot trades linked to transactions in bonds on a case by case basis.
A senior Malaysian currency trader said the central bank told banks not to quote spot ringgit “so wide”, which dried up liquidity onshore.
While the central bank denied issuing any freeze on trading, Ibrahim told the news conference that the central bank has a responsibility to step in and tell banks to take temporary measures to calm the market.