Why the foreign currency deposit did not decline?

FFR > OPR – Nothing Surprising Here

Yes, this isn’t rocket science — even a first-year economics student could explain it.

The latest increase in foreign currency deposits doesn’t come as a surprise. As shown in the chart below, foreign currency holdings among businesses have become increasingly common, especially post–Liberation Day.

Why is this happening (again)? Simply put, the US Fed Funds Rate (FFR) remains above Malaysia’s Overnight Policy Rate (OPR). The chart below illustrates the OPR–FFR spread alongside USDMYR movements. The Ringgit began weakening when the Fed started its rate hike cycle in mid-2022.

But now MYR has strengthened — shouldn’t businesses convert back to MYR?

This is the main argument I keep hearing — that with the Ringgit currently trading around 4.25 (at the time of writing), compared to 4.50 earlier in the year, the sharp appreciation should encourage businesses to repatriate funds back to MYR.

That logic is flawed. As long as the FFR remains higher than domestic rates, the incentive to hold USD deposits persists.

The next chart shows that despite MYR appreciation, foreign currency deposits continue to rise — for the first time, we’re seeing a divergence between foreign deposit accumulation and the exchange rate.

Case in point: The spread between local 3-month fixed deposit rates and USD 3-month deposit rates is approximately 110bps (based on Octopus Bank rates).

A simple calculation: If you hold RM1 million, even at current FX levels, you would earn more by placing the funds in USD deposits.

So, what’s driving the Ringgit rally? It’s sentiment — and bonds.

A weaker DXY and CNY have positioned the Ringgit as one of the top-performing regional currencies. Moreover, post–Liberation Day, there has been an estimated RM17–18bn inflow into the bond market.

In my personal view, the Ringgit is slightly overvalued. The recent rally has been sentiment-driven rather than underpinned by macro fundamentals.