[KUALA LUMPUR] Malaysia’s increasing currency reserves are bolstering its defences against market volatility.
The country’s net foreign exchange (FX) reserves rose to US$94.7 billion at the end of April, according to the latest central bank data, the most since June 2022. Strong foreign inflows into local bonds and a weaker greenback, which enabled Bank Negara Malaysia (BNM) to unwind its net short forward FX position, both helped. These factors have strengthened the nation’s bulwark against external shocks.
“The narrowing net shorts in FX forward book, combined with higher headline reserves, means that net reserves are rising at a faster pace,” said Winson Phoon, head of fixed-income research at Maybank Securities, adding that Malaysia’s improving external resilience “helps support ringgit stability”.
The extra buffer may be coming at a fortuitous time. US President Donald Trump’s tariffs, Sino-American tensions and geopolitical uncertainty have boosted currency volatility, and a weakening of the US dollar has changed the FX dynamic for emerging markets.
As a trade-dependent economy, Malaysia and its currency are particularly vulnerable to trade tensions between its two largest export destinations – US and China.
The recent boost in foreign reserves comes partially from the US$5 billion foreign inflow into the nation’s conventional government securities in this quarter so far. That’s on track to be the largest quarterly inflow on record in data going back to 2005.
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Global funds have poured in amid optimism over the outlook of the ringgit and on rate-cut wagers, as BNM is the last rate-cut holdout in South-east Asia.
The situation is different from December. Back then, BNM’s net short forward FX book had widened to US$29.2 billion – just 0.2 per cent shy of an all-time low – as the central bank utilised currency forwards to support the ringgit.
Global funds pulled out of Malaysian bonds for a fourth straight month. And the ringgit was the second-worst performer in emerging Asia in the final quarter of 2024, trailing only the won.
BNM pared back its net short forward book position to US$24 billion in April, the narrowest since February 2024. The unwinding, which involves selling the local currency and buying the dollar, has not impacted the spot ringgit’s performance so far. In fact, the ringgit is South-east Asia’s top performer this quarter, after the Singapore dollar.
“A gradual pare-down of net short forward positions shouldn’t create major headwinds for ringgit strength,” Maybank’s Phoon added. BLOOMBERG
