Pegging a costly option

By ALIFAH ZAINUDDIN / Pic By TMR

Pegging the ringgit again would come at a high cost and take a toll on government reserves and the general health of the economy.

Oanda Corp head of trading for Asia Pacific Stephen Innes said the value of the currency should be based on purchasing power parity and market forces.

“Malaysia’s expanding economy means it relies on foreign direct investments, along with foreign investors, to buy local bonds.

“If the currency is pegged, international investors will likely turn to other bonds. If they own a bond whose currency is appreciating, it is worth more, so that attracts more investors,” Innes told The Malaysian Reserve in an email.

He said trying to defend a currency peg ultimately burns through foreign currency reserves and leaves the country in an even more precarious spot.

Invest Malaysia 2018

 (Pic by Muhd Amin Naharul/TMR)

Prime Minister Datuk Seri Mohd Najib Razak yesterday said the country would “never” again peg the local unit after the move led to a lost of confidence among investors and global markets in Malaysia.

The ringgit has gained as much as 11% over the last year to a fresh high of RM3.9255 at close yesterday.

A stronger domestic economy, a weaker dollar narrative and rising energy prices have supported the rally in the local unit.

Innes said the ringgit’s fair value should be close to the RM3.75 level, given the lower speculation factor arising from the inactivity of the currency on the non-deliverable forward market.

“The ringgit should be stronger as the economy is positioned favourably from both internal and external sectors.

“Natural gas and oil prices are improving and these activities should translate to a stronger currency as demand for bonds and equities would also increase,” he explained.

In view of the strong economic growth, the currency market has priced in a 70% probability of Bank Negara Malaysia raising its Overnight Policy Rate later this week. This has been the key factor driving the ringgit’s rise in recent weeks, as traders eagerly wait for the decision.