Policymakers in Indonesia and Malaysia have been so successful in quashing currency volatility that this is breeding a new danger: complacency.
Traders are being deprived of the experience to cope when fluctuations inevitably return, PT Bank OCBC NISP in Jakarta said.
At the same time, companies may cut back on hedging, exposing themselves to potential losses, PT Sinarmas Sekuritas said.
The three-month historical volatility for Indonesia’s rupiah has slumped for four straight quarters, falling to a four-year low of 2.53 percent in May from a high of 16 percent in 2013. Ringgit volatility has shrunk by two-thirds this year to 2.95 percent.
The two currencies were previously the most volatile in Asia — now they are the least after the Chinese yuan.
“The problem with stability is that it generates instability because you become complacent,” said Michael Every, head of financial markets research at Rabobank Group in Hong Kong. “You think things will always be the same and you don’t bother hedging and looking at risks at how things could change. You build the entire house on the beach and then the tide comes in and it gets swept away.”
The central banks of Indonesia and Malaysia both took steps last year to limit currency swings after volatility surged following the election victory of US President Donald Trump.
Bank Indonesia said it stepped in to stabilize the rupiah on Nov. 11 and traders have reported officials have been in the market regularly since then.
Bank Negara Malaysia cracked down on speculators around the same time as the ringgit slumped toward the weakest since the 1998 Asian financial crisis.
Policymakers enforced pre-existing curbs on trading in offshore non-deliverable forwards, which some investors said made it more difficult to hedge currency exposure.
Malaysia’s central bank has continued its clampdown, saying last week offshore ringgit derivatives traded on the exchanges of neighboring Singapore contravened its laws. At the same time, it has tried to address investor concerns by allowing funds to fully hedge their currency exposure.
The ringgit has stayed between 4.25 and 4.30 per US dollar since the end of May, compared with 3.85 to 4.49 last year. The rupiah traded in a range of just 1.3 percent in the second quarter, versus a quarterly average of almost 9 percent since 1991.
“It’s in the best interests of the economy to have deeper currency and interest-rate markets with sizable liquidity to execute, in order to support our aspirations for growth in the Indonesian economy,” said Johannes Husin, managing director for treasury at OCBC NISP in Jakarta. “It’s important for all Indonesian market stakeholders to stay alert and agile, in skill and in talent development, to cope with continuous changes in the global financial markets.”
Companies are also at risk from low volatility as they will be tempted to save costs by forgoing currency hedging, said Jeffrosenberg Tan, head of strategy at Sinarmas Sekuritas in Jakarta.
“Looking at the stability of the currency, I’m sure they will have less hedging,” he said. “Right now the global liquidity is still abundant and there are lot of funds flowing into emerging-market bonds. As long as that continues it’s fine, but in one or two years from now, if they have to pay the debt at a higher US$ rate, they will have a problem.”