The implied volatility has declined from a peak of 9.7% to about 3.7% currently. The influence of offshore market activities and its damaging spill-overs to the ringgit exchange rate have subsided, consistent with the significant decline in transaction volume in the NDF market. On the other hand, foreign exchange (FX) transaction volume in the onshore market has been sustained with improving transaction costs, facilitating business transactions for all market participants. The domestic bond market has also been more stable and the risks of significant sell-offs from non-residents and other major outflows have reduced. Non-residents now hold a more manageable level of 26.4% of total government bonds outstanding, down from the high of 34.7%. During the early part of 2017, a period of significant capital outflows, the spike in bond yields was short-lived while the ringgit exchange rate remained well supported. This was due to the net export proceeds conversion rule that helped to balance the flows. Short-term positions by nonresident investors exited the market, and the majority of non-resident holdings now comprised of longer term investors, providing stability and depth to the domestic bond market. All these were made possible with the measures introduced by the Financial Market Committee (FMC) and Bank Negara Malaysia (BNM). It was part of an overall strategy to deepen and broaden the financial market. The measures removed the external destabilising influence of offshore to the onshore market, while at the same time creating a conducive environment for the domestic financial market to develop.

With the influence of external factors squashed, the ringgit is now priced more efficiently and increasingly more reflective of Malaysia’s strong fundamentals. Nevertheless, questions remain as to why the ringgit is far from reflecting its fair value. Numerous research pieces by analysts based on real effective exchange rates, have in fact, indicated that the ringgit is one of the most undervalued emerging market currencies. Despite 1/7  BIS central bankers' speeches  strong GDP data for the first three quarters and better-than-expected exports performance in 2017, the ringgit exchange rate movements have remained lethargic, with flows and sentiments still driven by external factors and foreign players. At times it appears as if domestic traders were playing second fiddle in own their market. It is time for our traders to price the ringgit accordingly, and play their rightful role in their home market. The ringgit should reflect economic fundamentals and emerging data. It is time for our local traders to be brave, stand up and be counted. This reminds me of a saying by Abraham Lincoln ‘Whatever you are, be a good one’. Part II – What drives the level of the exchange rate? Granted, the ringgit does, to some extent, reflect Malaysia’s economic fundamentals. The fact that the ringgit’s recent recovery coincided with strong domestic data releases suggests that. Nevertheless, in a global financial market that is driven by short-term developments, the ringgit exchange rate can veer in unexpected directions and reach levels that are far from reflecting economic realities.