No capital controls is good news although I am not too familiar with the mechanism but how can the central bank peg by intervening unless they're taking their reserves to shore up the exchange rate.
It can potentially be a disaster. Reminds me of George Soros and the Bank of England.
MALAYSIA'S central bank is unlikely to reinstate the exchange-rate peg it imposed during the Asian financial crisis, even though the ringgit is sliding fast to levels seen against the greenback then, economists said yesterday.
The currency slid to a nine-year low of 3.7745 to the United States dollar on Monday - only slightly above the 3.80 peg introduced in 1998 - on the back of unexpectedly robust US jobs data.
The ringgit did claw back some ground yesterday, rising to 3.7464 against the greenback.
"Unless there is a significant upward pressure beyond that, we do not think that Bank Negara will consider going back to a peg as it would undermine investors' confidence in the country," said United Overseas Bank economist Ho Woei Chen.
The ringgit is also struggling against the Singdollar, hitting 2.7772 yesterday - the lowest level since 1981 - and down from 2.7689 on Monday. Bank Negara governor Zeti Akhtar Aziz told Bloomberg on Monday the ringgit is trading at levels that are "not reflective of the fundamentals of the Malaysian economy".
Some analysts say the currency could weaken to 3.90 to the US dollar if Malaysia's sovereign credit rating is downgraded by Fitch Ratings by the end of the month. Fitch has put Malaysia's rating under review with a negative outlook, citing concerns over the country's worsening trade balance and mounting troubles at heavily indebted state investment fund 1Malaysia Development Berhad (1MDB). Jitters over the 1MDB issue have already triggered foreign fund outflows that have pressured the ringgit further, said IG market strategist Bernard Aw.
Talk of a peg is an unwelcome reminder of the crisis in the late 1990s. Malaysia pegged the ringgit at 3.80 to the greenback in September 1998 after its currency fell 35 per cent in 1997. It maintained the peg for almost seven years.
Credit Suisse economist Michael Wan believes the Malaysian central bank will "aim at smoothing volatility as we move towards 3.80, rather than defending that level". That is because the exchange rate move is partly driven by the US dollar rally, which is affecting the whole region and not just the ringgit, he added.
"We expect Bank Negara to be prudent with its forex reserves. Reinstating the peg would probably result in a huge drawdown in forex reserves, unless the peg is accompanied with draconian capital controls," Mr Wan said.
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