Ringgit will not face extreme volatility thanks to managed float

Among the countries other than China that have been badly hit by the virus to-date are Iran (recording 16 deaths), South Korea (12) and Italy (10). San Francisco, one of the key cities in the United States, has declared a state of emergency.

The minimal volatility of the ringgit was attributed to BNM’s move in 2005 to allow the exchange rate of the ringgit to operate in a managed float, with its value being determined by economic fundamentals.

“The central bank would monitor the exchange rate against a currency basket to ensure that the exchange rate remains close to its fair value. Promoting the stability of the exchange rate continues to be a primary objective of policy,” the central bank said in a note published on its website then.

Prior to the managed float regime, the local currency had been pegged to the US dollar after periods of extreme volatility during the Asian financial crisis in the late 1990s. This was done to stabilise the economy as the ringgit was depreciating against major currencies.

Unlike managed float, the free float of currency is solely determined by market forces of demand and supply of foreign and domestic currencies, with no government intervention.

Ringgit’s performance influenced by political uncertainty and COVID-19

Sunway University Business School economics professor Dr Yeah Kim Leng said although the ringgit is currently weakened by the political turbulence and COVID-19 outbreak, the currency is unlikely to decline to its worst after the new government is constituted.

“Its short-term fair value remains well supported by ample domestic liquidity, continuing current account surplus, ongoing positive economic growth, manageable inflation, and interest rate differentials against most developed economies, including the US,” he told Bernama.

As of now, investors are waiting for the outcome of the meeting between Yang di-Pertuan Agong Al-Sultan Abdullah Ri’ayatuddin Al-Mustafa Billah Shah with the 222 Members of Parliament, which concluded this evening.

They are also awaiting the much anticipated economic stimulus package, which is scheduled to be announced tomorrow by interim Prime Minister Tun Dr Mahathir Mohamad.

Yeah, who is also the deputy president of the Malaysian Economic Association, also commented that if there is a need to peg the ringgit, it should only be a last resort when faced with massive capital flight and loss of investor confidence.

“A flexible currency enables the economy to adjust to external shocks such as the COVID-19 outbreak. For example, Australia has seen its currency depreciating sharply due to its strong trade linkages with the Chinese economy which is hard hit by the outbreak,” he added.

Echoing Yeah’s view, FXTM market analyst Han Tan said the political developments in Malaysia will leave investors to ultimately interpret the political manoeuvring through the lens of policy continuity in determining whether the ringgit should remain on the weaker side of 4.20 against the US dollar.

“Should the mix of downside risks grow more potent, US dollar/ringgit may carve out a path towards the 4.24-4.25 region, until there is more clarity with regards to Malaysia’s policy and economic outlook,” he said.

In conclusion, analysts are upbeat the market would rebound after the dust has settled and the political uncertainty evaporates, backed by Malaysia’s diversified economic portfolio as well as its solid fundamentals. — Bernama