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Malaysia's Central Bank Clampdown rattles Foreign Investors

The Malaysian central bank 

According to Macquarie Bank Ltd, the Malaysian central bank’s steps to restraint trading in offshore non-deliverable forwards last year has made it difficult for global funds to hedge their exposure to Malaysia.
The central bank warned foreign banks not to engage in NDF-related transactions, a move that turned the Ringgit into emerging Asia’s least volatile currency.

In November 2016 the difference between onshore and forward prices for the Ringgit jumped to a record high, urging the central bank to initiate the crackdown, that resulted in the country's currency volatility to dwindle to the lowest in four years. Volatility dropped to 2.5 percent last week, the lowest since December 2012.

As the one month volatility measure for the Ringgit tumbled around mid-November capital flight was initiated in the south east country. Central bank data show that in November and December alone global funds cut their holdings of Malaysian debt by a combined 25.2 billion Ringgit ($5.7 billion), the biggest outflows in two months since 2008.

Since Nov. 15 the Ringgit has fallen almost 2 percent, it dipped to 4.5002 per dollar on Jan. 4 to become the region's worst performing currency after the yen the weakest since the Asian financial crisis.
Even though oil prices are stabilized and the Malaysian central bank has dismissed earlier speculation, it's about to impose capital controls the Ringgit is still trading at its weakest since 1998, the current spot rate is at 4.4370/$1 as of 12:12 p.m. on Tuesday in Kuala Lumpur and according to a Bloomberg survey might reach 4.53 by mid of the year.

According to the most recent data through Jan. 13 the country’s foreign Reserve dropped to a 14-month low of $94.3 billion. Malaysia’s dwindling foreign-exchange reserves mean it has less power to defend its currency. The country has seen it reserve decline for the past four years.

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