Speculators thought the Malaysian currency was a tiger. It turned out to be a kitten.
A month after Malaysia unleashed the ringgit from the United States dollar, it has yet to live up to expectations for a sharp rise against the greenback and fat profits for foreign speculators.
Instead, it has made only a meek gain of around 1 percent on the US dollar, kept on a short leash by the central bank which has intervened in the market to snuff out any rapid appreciation.
But the stakes remain high, with up to US$20 billion (HK$156 billion) worth of “hot money” estimated to be parked in Malaysian assets, waiting for the ringgit to climb to the point where they can cash out.
Bankers and economists feel this is unlikely but say there is still a risk the tide could suddenly go out on the currency and local markets, jolting the economy.
“The big money is already in the country … My concern is that when it starts to go out, the pace at which it goes out will have a big impact on the market,” a senior Malaysian banker said.
The hot money may be growing impatient, partly because the deluge has helped take yields on Malaysian government debt below those on US treasuries.
Foreigners who borrowed US dollars recently to invest in Malaysian paper are losing money every day.
So why does the ringgit not put them out of their misery and climb by about 10 percent to the US dollar, as many economists feel it should?
Central bank intervention is only part of the answer.
In theory, market forces can move the ringgit with Bank Negara stepping in when it feels the currency is departing from fair value, as determined by an undisclosed basket of currencies.
But thanks to the old fixed-currency regime, there is very little ringgit held offshore, so trade is carried out in Bank Negara’s own backyard where it can track foreign exchange flows to ensure they comply with its rules on currency transactions.
There are very strict limits on moving ringgit abroad, which effectively amounts to a ban on offshore trade.
“Small trading economies like Malaysia have a major fear of having too much of their currency abroad as this will increase volatility and invite speculation,” said Yeah Kim Leng, chief operating officer of economic research outfit RAM Consultancy.
“It would be hard to ensure currency stability and to manage the ringgit if offshore trading were allowed.”
Foreigners can invest as much as they want in the ringgit but, in general, there has to be an underlying transaction, such as a bond or share purchase.
They cannot buy the ringgit forward from locals without them hedging some underlying transaction.
The ringgit was freed from its peg of 3.8 to the US dollar July 21, immediately after Beijing announced a 2.1 percent revaluation of the yuan and a shift to managing it against a basket of currencies rather than just the US dollar.
The yuan was also seen as undervalued, but since its revaluation has risen only about 0.1 percent against the US dollar. Right now, ringgit forwards predict the currency will rise by about 2 percent within a year.
This is the opposite of what might normally be expected of a currency yielding less than the US dollar and reflects the market’s enormous bet that it will appreciate.
Malaysia’s overnight policy rate is 2.7 percent, against the US official rate of 3.5 percent, and the gap could widen with the US Federal Reserve expected to keep raising rates and Malaysia insisting its rates do not need to rise.
Malaysia’s five-year government bond is yielding about 80 basis points less than the equivalent US paper.
After inflation, running at around six-year highs in Malaysia, the real return on the Malaysian five-year is almost nothing. To some bankers and economists, Bank Negara will find it difficult to maintain its balancing act – holding onto foreign capital, parked mainly in bond markets, but keeping down rates and the ringgit so there is a disincentive for them to remain.
“It’s always a concern,” said Daniel Koh, head of global markets for Standard Chartered in Malaysia. “Probably in the medium to long term, it’s not possible to do both.”
If, as bankers and economists expect, the ringgit makes a smooth transition to a managed float, no one sees Malaysia taking the next step and internationalising the ringgit any time soon.
“I think they will do it eventually but I don’t believe it’s going to happen in the short term,” HSBC Malaysia treasurer John McGowan said.
Thursday, pressured by foreign investors selling local assets, the ringgit eased to a low of 3.7687 per US dollar, its weakest level since July 22.
by Mark Bendeich and Liau Y-Sing
Photo credit: lunaticg.blogspot via VisualHunt / CC BY-SA
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