Foreign banks shaken by Malaysia's move to halt currency slide

Thu Nov 17, 2016 2:25am EST
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By Saikat Chatterjee and Praveen Menon

HONG KONG/KUALA LUMPUR (Reuters) - Foreign banks in Malaysia on Thursday were trying to work out how to comply with the central bank's clamp-down on offshore ringgit trading, a move the broader market views as a form of capital controls.

Form letters, sent this week from onshore banks to their offshore counterparts, asked compliance officers to sign commitments to cease trading the ringgit in the NDF markets and then send the letters back to Bank Negara, Reuters reported on Wednesday.

"There's a massive back and forth going on between banks and Bank Negara Malaysia (BNM) now," said a banker at a foreign bank in Malaysia that deals in foreign currency transactions. "This is a type of indirect capital control ... I see a flood of people exiting Malaysia."

The ringgit MYR= had fallen nearly 1 percent on Thursday to a fresh 11-month low of 4.3850 against the dollar. The offshore spreads in NDF markets widened, while bond yields shot higher with the 10-year benchmark yield MY10YT=RR trading 17 basis points up at 4.22 percent. It has risen nearly 60 basis points in the last week.

Investors typically use the liquid NDF markets in Singapore and Hong Kong to exchange ringgit for dollars because of the many restrictions in the domestic market.

Singapore and Hong Kong are ranked third and fourth at $517 billion and $437 billion respectively on global daily average turnover of foreign exchange derivatives, according to the latest survey from the Bank of International Settlements. The United States and Britain are the top two.

'STATE OF LIMBO'   Continued...

A general view of the headquarters of Malaysia's central bank, Bank Negara Malaysia, in Kuala Lumpur January 29, 2013.  REUTERS/Bazuki Muhammad/File Photo