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Malaysia Caught in Currency Ripples

Malaysia’s central bank should be careful what it wishes for. Attempts to arrest the slump in the ringgit risk unintended consequences that may be worse than the volatility it’s trying to quell.

On Friday, Bank Negara Malaysia Assistant Governor Adnan Zaylani answered yes when reporters in Kuala Lumpur asked whether his institution was intervening in the foreign-exchange market. That was no news to currency traders, who had seen the spot market effectively freeze on Nov. 11. The effect of the action, however, was brutal and felt as far away as Jakarta. 

On the day of the intervention, traders and investors turned to the non-deliverable forward market, over which central banks don’t have direct control. Besides widening the gap with the currency’s onshore value, as already pointed out by Gadfly’s Andy Mukherjee, the implied yield on the ringgit’s non-deliverable forwards went ballistic.

On Thursday, the day before the central bank acknowledged intervening in currency markets, implied yields in non-deliverable forward contracts hit the highest since 2008

If Bank Negara was trying to send a message, it succeeded. The trouble is that its missive has reverberated across the region. On Nov. 14, the one-month implied yield on Indonesian rupiah non-deliverable forwards hit the highest since 2013 and those on the Philippine peso were at a six-year high. 

Implied yields on non-deliverable forwards from Indonesia were affected as the intervention in Malaysia sent investors scurrying across the region

The currencies hardly needed any more volatility, having already been buffeted by a spike in dollar strength following the election of Donald Trump as U.S. president. While short-term rates are now showing signs of stabilizing, they are doing so at a higher level.

The ripples don’t end there, though. The Malaysian central bank’s intervention has also had a severe impact on hedging and refinancing costs. Thanks to the twin increases in non-deliverable forward rates and volatility in Southeast Asian currencies it is now, in some cases, 10 times more expensive to protect against dollar exposure than it was just two weeks ago. Many chief financial officers across the region are likely to be quite upset at Bank Negara Malaysia.

A drop in hedging and refinancing activities would be bad news for banks. Ironically, Malaysian financial institutions could be the worst affected. They’re the biggest issuers of short-term dollar debt, with more than $3.5 billion of bonds due in less than a year outstanding.

Malaysian banks are the most dependent on short-term markets for dollar funding in Southeast Asia

Now, it’s not only more expensive to pay back that debt, given the drop in Malaysian firms’ home currency, the cost of hedging their dollar exposure has also become exorbitant if they haven’t already done so.

Next time Bank Negara Malaysia decides to stop its currency from dropping, it should look into chaos theory. A decision made in Kuala Lumpur can have effects across the seas — and eventually that shock wave will return.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Christopher Langner is a markets columnist for Bloomberg Gadfly. He previously covered corporate finance for Bloomberg News, and has written for Reuters/IFR, Forbes, the Wall Street Journal and Mergermarket.