August 14, 2015
The Malaysian ringgit suffered its steepest one-day fall since the Asian financial crisis on Friday, as the effects of China’s new currency regime continued to ripple across the region.
The ringgit tumbled as much as 2.8 per cent in morning trading to 4.127 against the US dollar, its lowest level since 1998. Asian currencies have been hit this week by a state-engineered slide in the renminbi, with Malaysia the worst affected.
Currency watchers say Malaysia’s central bank has opted to step back from intervening in the market in response to the falling renminbi, unleashing pent-up downward pressure on the ringgit.
“Bank Negara Malaysia appears to have reduced its attempts to prevent ringgit weakness,” wrote analysts at HSBC. “The depreciation in the renminbi, and contagion to other Asian currencies, will likely encourage the BNM to allow greater flexibility in the ringgit exchange rate.”
The sharp fall in the ringgit came even as the People’s Bank of China set its daily currency fix slightly stronger compared with Thursday, helping to steady the renminbi after a tumultuous week.
The fixing rate, around which the Chinese currency can rise or fall by a maximum of 2 per cent a day against the dollar, was set at 6.3975, or 0.05 per cent higher than the previous day.
Nevertheless, most regional currencies dropped on Friday, with the South Korean won down 0.9 per cent against the US currency and the Singapore dollar shedding 0.6 per cent.
China’s move this week to weaken the renminbi has sent shockwaves through global markets, raising fears of a fresh round in the currency wars and heightening concerns about deflationary pressure in western economies.
On Tuesday, the PBoC used the daily fix to weaken the renminbi by 1.9 per cent, the most on record. Further declines followed on Wednesday and Thursday, prompting speculation Beijing was seeking a competitive devaluation to help spur the slowing Chinese economy.
However, on Thursday the central bank sought to calm nerves with a rare press conference at which officials downplayed the idea of a prolonged slide in the Chinese currency.
“It has been a dramatic week, with news from China driving global risk aversion,” said analysts at Nomura. “While a more sustained move toward a weaker renminbi seems quite probable, we are inclined to think the authorities will remain in control of the situation.”
Sentiment towards Malaysia has been damped by a range of factors including sharp falls in global energy prices since the end of June. Malaysia is a major exporter of both oil and natural gas, with crude accounting for almost a third of government revenue.
The country is also among the most vulnerable to rising US interest rates, with the level of foreign ownership of government debt among the highest in the emerging world.
Domestic politics have also played a role, after a probe into scandal-hit 1Malaysia Development Berhad, a state investment fund, engulfed the prime minister.
While figures released on Thursday showed Malaysia’s economy performed better than expected in the second quarter, growth was still the slowest in two years and many analysts predict further weakness ahead.
“The sharp fall in prices for Malaysia’s energy exports over the past year will put downward pressure on GDP growth, as lower prices hit government revenues and investment in the energy sector,” Capital Economics noted. (FT)
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