Pace of MYR decline could slow, but negative sentiment exists

The MYR is still one of the most vulnerable to a further fall in oil prices and China's slowdown. It is also sensitive to USD and CNY movements even relative to EM Asia peers. 

Its high beta nature partly reflects the active foreign participation in local financial markets, and partly the authorities' cautiousness in using its limited FX reserves to break the currency's fall. 

The government seems to see some merit to the currency adjustments, in playing the role of an automatic stabiliser and shielding the domestic capital markets from the effect of large capital movements. Hence, the government has emphasised that it will not implement capital controls or revert to a pegged currency regime. 

Given the recent reserves decline, greater reliance is seen on measures to encourage capital inflows. However, while these measures may slow the MYR's decline they will not alter its direction. 

According to Barclays, there is scope for the pace of the MYR's decline to slow due to,

• A lot of bad news being priced in
  
  
• The already cheap currency
  
  
• The potential for more macroprudential measures to encourage capital inflows.