economy

BNM: The ringgit's trend is driven by US rate cuts, with local factors supporting its strength

KUALA LUMPUR: The ringgit's strength against the US dollar is mainly driven by the US Federal Reserve's rate cuts, however local factors support its continued strength, according to Bank negara Malaysia (BNM).

BNM said in its Financial Markets Committee (FMC) discussion summary, that the ringgit uptrend in the third quarter was mainly driven by the US Federal Reserve's (Fed) 50 basis points (bps) policy rate cut, and greater clarity on the trajectory for further reductions.

Bank Negara Malaysia (BNM) said the local note was one of the best performing currencies globally, strengthening 14.4 per cent against the dollar in the third quarter of 2024 (3Q24) and 11.4 per cent on a year-to-date (YTD) basis.

Despite the dominance of external factors, BNM said a few key developments support the continued positive trend of the ringgit.

The FMC said that the ongoing coordinated efforts by the government and BNM to encourage repatriation and conversion of foreign income proceeds by government-linked companies (GLCs), government-linked investment companies (GLICs) and corporates have contributed to ample domestic foreign exchange (FX) market liquidity.

It averaged at a daily volume of US$17.6 billion. 

"FMC members noted that the current arrangement can be sustained to ensure better liquidity in the onshore FX market," BNM saidy.

Furthermore, the central bank also said investor confidence in Malaysia has improved following Malaysia's robust economic growth and the government's continued commitment to structural reforms.  It added that significant foreign portfolio inflows were observed in 3Q24 amidst the strong KLCI performance and normalising Malaysian Government Securities-US Treasury Securities (MGS-UST) spread. 

"Members also viewed that the frequent investor engagements by the authorities were beneficial in raising awareness of Malaysia as an attractive investment destination and reaffirmed the importance of continued policy coherence and consistency," it said.

BNM added that members also shared observations of corporate behavioural changes amidst the recovery of the ringgit. 

"Among exporters, there was a shift in sentiment that led to more interest for conversion of export proceeds, while importers have also reduced their front-loading tendencies by purchasing only required quantities for their business activities," it said.

On the domestic bond and sukuk market, BNM said the meeting addressed measures to enhance liquidity and expand the investor base in the corporate bond and sukuk sectors.

In the near term, BNM highlighted key initiatives, including the introduction of corporate bond and sukuk trading as part of the principal dealers' (PD) framework for market development assessment.

This also involves investor engagement sessions with key industry stakeholders to familiarise non-residents with Malaysian corporate bonds, sukuk structures, and government bonds.

Their plans include collaborating with the Malaysian Investment Banking Association (MIBA) on an investor-issuer forum scheduled for 2025.

The forum will showcase and promote awareness of green and sustainable opportunities within the corporate sector. "Members also noted the ongoing engagements with major bond index providers and foreign investors to promote the inclusion of Malaysian Government Investment Issues (MGII) in global bond indices," it added.

On the proposed full transition to Malaysia Overnight Rate (MYOR)/Malaysia Islamic Overnight Rate (MYOR-i) and permanent cessation of KLIBOR, BNM said it would seek to engage relevant associations and organisations to request for feedback and ensure comprehensive coverage of all key stakeholders. 

It noted that the consultation period would last for one month.

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