KUALA LUMPUR: The ringgit is now priced more efficiently and increasingly more reflective of Malaysia’s strong fundamentals yet the movements of the local note is still lethargic, said Bank Negara Malaysia governor Tan Sri Muhammad Ibrahim.
He said most of the movements of the ringgit was not driven by facts, but misperceptions.
“Despite strong GDP data for the first three quarters and better-than-expected exports performance in 2017, the ringgit exchange rate movements have remained lethargic, with flows and sentiments still driven by external factors and foreign players,” he said at the Financial Market Association of Malaysia’s annual dinner two days ago.
The local note has stabilised greatly this year from a year ago when volatility peaked at 9.7 per cent.
In contrast, the volatility has dropped to 3.7 per cent while foreign exchange (FX) transaction volume in the onshore market has been sustained with improving transaction costs, facilitating business transactions for all market participants.
It continues to record robust activities in the financial market, reaching daily volume as high as US$16.1 billion compared to US$14.1 billion recorded in 2016. The onshore market volume on forwards and swaps alone has surpassed the observed offshore forward market volume which now records an average of US$1.0 billion a day.
In the bond market, non-residents hold a more manageable level of 26.4 per cent of total government bonds outstanding, down from the high of 34.7 per cent.
Muhammad listed five instances of misperceptions that have been making its rounds in the market.
“First, the perception is that the ringgit is driven by oil prices, that lower oil price reduces foreign exchange earnings of the country and government’s revenue from the oil industry.”
Then, there is the perception among FX dealers and traders, that the offshore market knows how to correctly price or is better at valuing the ringgit, despite its “opaqueness and suspicious pricing”.
“As a result, the onshore market is looking offshore for guidance on the direction and pricing of the ringgit.”
The negative perception that the onshore market lacks the necessary liquidity has also been driving the ringgit exchange rate weaker.
The market also perceived that significant non-resident participation in the onshore bond market is the main reason for the market’s liquidity and that the reversal of NR holdings will have negative bearing on the ringgit and market liquidity;
“There is also gross misperception on the adequacy of the reserves that if it is less than US$100 billion, it is not sufficient to provide comfort to investors”
Accordingly, market pessimism reaches new levels when it falls below the threshold.
Muhammad said apart from perception, the ringgit movement has also been driven by adverse sentiments which have been shaped by analysts – high level of external debt, government financial position and governance, and negative news headlines.
On Bank Negara’s interventions in the market, he explained that they are to ensure that the market has “sufficient liquidity in stressed conditions” not to manage the level of exchange rate as the ringgit remains a floating currency.