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Wednesday, August 5, 2015

'Ringgit risk reverses, volatility reduced'?

'Ringgit risk reverses, volatility reduced'?
KUALA LUMPUR - The difference in the trade between the offshore and onshore ringgit market narrowed yesterday, indicating that the volatility in the domestic currency has reduced for now.
As at yesterday evening, the offshore non-deliverable forward (NDF) yield for the one-month tenure was at 4.99%, while the onshore one-month yield was at 3.29%, a difference of 1.7%. A day earlier, the difference was almost 5%.
“The narrowing of the offshore and onshore trading of the ringgit indicates a trend of reduced volatilty for the ringgit,” said a currency analyst.
Traders, when contacted, said the reason for the narrowing of the arbitrage could be due to a few reasons.
“One is that Bank Negara seems to allow the ringgit to trade up to 3.85 against the US dollar, sending a signal that it would not keep it at 3.80 as anticipated,” said the analyst.
The analyst added that another reason could be due to the reduced overnight open position on the ringgit in the onshore market.
He said most local traders closed their positions for the day in the evening.
“This reduces the risk of holding the ringgit in an open position overnight,” said the analyst.
Since 1998, the ringgit has no longer been traded offshore. However, there is an offshore market for US dollar-ringgit trades that are settled in US dollars. The offshore market is known as the NDF and trades can be in tenures of one month to a year.
The average daily trading volume in the onshore ringgit forward market is US$1bil to US$1.5bil, while the average daily trading volume for the ringgit in the NDF market is US$1.5bil.
Based on the practice, the opening levels in the onshore rate for the ringgit are largely dependent on the offshore NDF rate that is traded overnight.
“The onshore dollar-ringgit rate fixing is decided at about 11am everyday and monitored by Bank Negara. But the opening price at about 8am in the morning tends to be based on the offshore NDF traded in New York,” said Dr Suresh Ramanathan, an independent interest rate and foreign exchange strategist.
“It is obvious that the forward market, onshore and offshore, is large,” said Suresh.
He explained that the fixing of the NDF reference rate is the onshore spot rate.
“Although this limits the speculative behaviour of the currency, the ability for foreign banks in Kuala Lumpur to have access to both the onshore spot, onshore forward and offshore NDF, suggests that there is still a decent amount of speculative play on the currency,” he said.
Currently, the only arbitrage and speculative play that is available for the ringgit is via two channels, onshore foreign banks in Malaysia (that have a presence offshore) via having an underlying instrument, and offshore foreign banks (that have no presence in Malaysia).
“Offshore foreign banks that have no presence in Malaysia do not need to have any underlying instruments. They just trade the ringgit NDF, and use the onshore spot fixing as a reference rate to close the trade,” said Suresh.
Meanwhile, RAM Rating Services Bhd economist and head of research Kristina Fong said most of the movements in the ringgit over the last year had been caused by non-fundamental-based reasons, such as investor sentiment and the perception that growth in Malaysia would be a lot worse because oil prices were down by some 50%.
Fong said it had been a double-edged sword for the ringgit, not just because the ringgit has been depreciating, but also because the dollar has been strengthening. On a one-year basis, the ringgit is down by some 19.2%.
Fong expects the ringgit to average at RM3.75 this year, meaning it will likely further weaken to the RM3.80 to RM3.90 level by year-end. She does not see the ringgit heading to the RM4 level.
MIDF Research said the expected increase in US interest rates, falling oil prices and the domestic political instability were the main reasons for the recent downfall of the ringgit.
“We stand by the opinion that the current depreciation of the ringgit is more due to negative sentiment rather than reflecting the fundamental condition of Malaysia’s economy,” said MIDF.
They too expect the ringgit to be in the range of RM3.80 to RM3.90 by year-end. To-date, none of the analyst forecasts compiled by Bloomberg expect the ringgit to fall to RM4.00 by year-end. - ANN

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