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Friday, 25 November 2016

The Ringgit Exchange Rate was set in Singapore until 2013

Blame it on Donald Trump. Ever since he won the American presidency by surprise, the Ringgit has been in a slump. The investors bought into his "Make America Great Again" campaign promise, and have withdrawn their funds from Malaysia.

That puts demand for the Ringgit at a low, while pushing up demand for the US Dollar. End result: Ringgit exchange rate falls, and falls.

So I was reading the Sydney Morning Herald when I came across this piece of news which made me very surprised.

In 2011, ANZ Bank and Macquarie were in cartel for attempted rigging of Ringgit exchange rate

It happened that the two Australian banks had currency traders who tried to coordinate their efforts so that traders from all banks would submit high MYR rates. That would influence the MYR Fixing Rate.

What was that.... the MYR Fixing Rate? I was intrigued.

Here it is, from the said article:
Malaysia's exchange rate does not float freely on global markets as the Australian dollar does. Instead, it is set through daily process where 15 banks submit their view on the rate based on their own transactions. The Association of Banks in Singapore excludes submissions in the top and bottom quartile, then sets the rate based on the two middle quartiles. (Source: SMH)

I didn't know that the Association of Banks was so powerful. I also didn't know that banks' views of the Ringgit rate could be so important. 

If that was the case, I would lobby to put more Malaysians in the top management of foreign banks. Well, not just any bank, but the 15 banks that were mentioned.

And then everything changed in 2013.

In 2013, Bank Negara managed to stop the "ringgit rate benchmark" from being set in the Singapore republic. 

Instead, it was replaced by the "onshore ringgit rate", which was set in Malaysia. (Source: Focus Malaysia, 22nd June 2013. "Bank Negara wins tussle over Singapore ringgit rate fixing")

That probably ended the Ringgit "cartel", in those years. Hurray for Bank Negara! Hurray for Zeti, who was the central bank governor then! (Zeti's now heading a new business school.)

But the Ringgit is still weak today. 

So how is the ringgit rate fixed today?

Since July 18 this year, there has been a new mechanism. The value of the Ringgit is now based on the volume traded.

This was interpreted to mean that, banks cannot collude to fix the rate.

It is also expected to reduce the volatility of the currency and make it more "market driven".

Here is a rather important-looking extract of the newspaper report:

The central bank on Wednesday had said a new methodology for the US dollar/ringgit spot fixing taking effect from July 18 would be based on market transaction data rather than submission of quotations by selected banks as it is under the existing system.

Concurrently, Bank Negara said, the official closing hour for the onshore ringgit market would also be extended from 5pm to 6pm effective on the same day next month to give businesses additional time to complete their forex transactions.

Under the new mechanism, the ringgit will be computed based on the weighted average volume of the interbank US dollar/ringgit forex spot rate transacted by domestic financial institutions between 8am and 3pm, and the exchange rate would be published at 3.30pm daily.

This is opposed to the existing system, whereby the exchange rate between the ringgit and the US dollar is fixed based on quotations by selected domestic banks, and is published at about 11am.

According to Bank Negara, the new methodology is more transparent and will better reflect underlying trades during the day. The market transaction data is sourced from online reporting by domestic financial institutions to the central bank. (Source: The Star Online)

Whatever it means, it looks pretty exciting to me. I only hope that the government takes good care of the Ringgit exchange rate.

I'm not an expert on currency exchange rates, but my wife likes to travel every once in a while. When the Ringgit is weak, it means that I should not travel overseas. I've told my wife that we can travel overseas if it is for business or work, but that point never seems to sink in. She's only interested in enjoying a holiday overseas, and then come home to talk about it.

I'm different, because I'm the main breadwinner of the family. I have to make sure that we can survive to the following month. I have to provide what the family needs while trying to give my wife and kids what they want. As you may know, needs and wants are two different things...

Here are some thoughts as I close this piece.

First, we need the Ringgit to become strong again, because this country is dependent on imported goods.

Second, if the Ringgit continues to slide, Malaysian exports will become relatively cheap. Then I should quit my job and become an exporter!

Third, if your wife is obsessed with some form of tulip mania, you will still go broke, even if you have lots of Ringgit and even if the exchange rate is good.

Fourth, how I wish that some blessed guru would appear and give me money lessons, just like the Ancient One taught Doctor Strange. And then I can be strange-but-cool like Doctor Strange.

Thanks for reading.

Here are some other pieces from me.