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Malaysia central bank Forex reserves: higher than expected
24/11/2016
Malaysia central bank Forex reserves: higher than expected

Malaysia central bank Forex reserves have appeared higher-than-expected. Analysts believe that valuation effects should have triggered the fall in reserves. How did Bank Negara Malaysia increase its Forex reserves?

24 November, AtoZForex Earlier last week, the central bank of Malaysia has asked all the foreign banks to commit to avoiding offshore ringgit trading. This weighed on ringgit.

Malaysia central bank Forex reserves

Moreover, last week, Bank Negara Malaysia (BNM) has stated that it has intervened the market to support the ringgit in the wake of Trump’s victory. Such intervention should have shown up in the country’s Forex reserves as a loss. This is due to the fact that the central bank would normally need to sell foreign currencies to buy local currency.

However, BNM has informed public that its international reserves are totaling at 407.8 billion ringgit ($98.3 billion), as of November 15. In addition, the bank had 405.5 billion ringgit as of October 31. Moreover, the central bank did not immediately comment on the unusual rise in reserves. Jason Daw, a foreign-exchange analyst at Societe Generale, has commented:

“A surprise increase in foreign-exchange reserves and BNM reassuring investors that capital markets and the banking system are deep and liquid in their policy statement leaves more questions than answers.”

Moreover, Mr. Daw believes that valuation effects alone should have triggered the fall in reserves. He states that it is unlikely that USD buying took place in the period between 1st November and 15th November. In addition, Mr. Daw believes that Malaysia’s swap line with the People’s Bank of China (PBOC) might have been tapped for dollar liquidity. The arrangement of swap provides two banks with the opportunity to guarantee the liquidity in each other’s currencies. This is aimed at backing the investment and trade.

US election affected ringgit

Additionally, Mr. Daw has mentioned that Malaysia possesses “significant resources” to maintain any stress from outflows. Yet, he added that “sentiment has been damaged and the ringgit should remain on edge.”

For the Malaysian currency, US election outcome has been appearing mostly negative. By Thursday, the USD rose as much as 6.5 percent versus ringgit. The greenback hit 4.4630 a ringgit, its highest since September 2015.

Central bank’s recent move in regards to offshore non-deliverable forwards (NDFs) on the currency has also affected the sentiment on the ringgit. The central bank of Malaysia has informed foreign banks sending them a form letter. It has asked for an “unconditional representation and commitment” to avoid trading in any offshore Malaysian ringgit non-deliverable forwards derivatives market.

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