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Foreign Exchange

Malaysian central bank announces measures to “spur growth of the FX market”

Bank Negara Malaysia has announced measures to liberalize the domestic foreign exchange market and interest-rate derivatives markets, the central bank said in a statement.

Bank Negara said it aimed to further spur the domestic foreign exchange market through greater product innovation and by licensing onshore banks to trade foreign currency against another foreign currency with a resident. Malaysian residents are now also permitted to convert existing ringgit or foreign currency debt obligation into another foreign currency, granting investors greater flexibility of asset liability management.

The measures took effect on Tuesday.

“The real FX implications from these measures are probably fairly limited, but it is further evidence that the Malaysian authorities are taking steps to further liberalize financial markets and we expect this trend to continue,” says Thomas Harr, head of Asian FX strategy at Standard Chartered.

The Malaysian ringgit did, however, stage a small rally after the central bank announcement on speculation that further financial market liberalization could attract greater foreign investment into the nation’s high-yielding assets.

The move rounded off the ringgit’s strongest monthly advance in three years, with the currency gaining 4.5% in January to R$3.0500 per dollar. January’s gains have helped the ringgit offset the losses in September, when the currency lost more than 8% against the dollar as risk aversion surrounding the European debt crisis prompted investors to liquidate many emerging market currency and stock market positions.

When Malaysia de-pegged from the US dollar on July 21, 2005, like several other Asian central banks, Bank Negara allowed the currency to operate in a managed float against a trade-weighted basket of currencies, intervening when the ringgit strayed too far away from its trade weighted fair-value approximations.

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