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Malaysian ringgit sinks offshore just as economy perks up

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by November 11, 2016 General

By Jongwoo Cheon and Joseph Sipalan

SINGAPORE/KUALA LUMPUR (Reuters) – Malaysia’s ringgit plunged to its weakest in more than 12 years in offshore markets on Friday as investors dumped government bonds, forcing the central bank to use its persuasive powers to keep the spot rate steady by deterring sellers onshore.

As the currency slumped offshore, Bank Negara Malaysia governor Muhammad Ibrahim unveiled better than expected third quarter economic growth and current account data, and said the ringgit should not be priced out of sync with fundamentals.

“The situation now is result of speculative positioning… We don’t want to be dictated by factors that have nothing to do with the country’s fundamentals,” Ibrahim told a news conference.

Those fundamentals include an economy that grew 4.3 percent in the third quarter, accelerating after five straight quarters of decline, and a current account surplus that widened to 6 billion ringgit ($1.4 billion) in the third quarter, from 1.9 billion ringgit in the previous quarter.

Malaysia was not alone as other emerging Asian currencies and bonds lost ground too. Investors fear capital outflows from the region once Donald Trump assumes the presidency as he is expected to adopt policies that are likely to increase U.S. interest rates faster than previously thought.

The ringgit’s one-month non-deliverable forwards (NDFs) lost as much as 3.7 percent from the previous close to 4.5395 per dollar, its weakest since at least September 2004, according to Thomson Reuters data.

By contrast, the ringgit spot barely moved at 4.27 per dollar with liquidity extremely thin. As a result, the dollar/ringgit’s NDFs premium over the dollar/ringgit spot increased to 0.2695, the widest since at least April 2008, according to Reuters data.

Traders in Kuala Lumpur said the central bank told big investors that they will allow spot trades linked to transactions in bonds on a case by case basis.

A senior Malaysian currency trader said the central bank told banks not to quote spot ringgit “so wide”, which dried up liquidity onshore.

While the central bank denied issuing any freeze on trading, Ibrahim told the news conference that the central bank has a responsibility to step in and tell banks to take temporary measures to calm the market.

INTERVENTION EXPECTED

UOB economist Julia Goh said intervention from central banks in order to manage stability in markets would be expected, and that given the divergence between spot ringgit and NDF, Bank Negara’s actions were justifiable.

“It’s probably because of this current period of volatility because of the U.S. elections… It seems financial markets are still digesting the news, and we can continue to expect more volatility ahead,” she said.

The ringgit has gained 0.5 percent this year. It slid more than 20 percent last year due to slumping oil prices, slowing demand from top trade partner China, and a financial and political scandal at state-fund 1Malaysia Development Berhad (1MDB).

The currency’s plunge on Friday came as Malaysia’s government bond prices fell with the 10-year yield at 3.821 percent, rising 22 basis points since Wednesday to its highest since June 28. The yields on 20-year and 30-year bonds have risen 21 basis points and 10 basis points since Wednesday.

Foreign investors, who hold about 40 percent of outstanding government bonds, pulled 8.4 billion ringgit out of that market in September, after three months of inflows.

That was the largest monthly outflow since August last year when the country’s markets tumbled on a political crisis swirling around Prime Minister Najib Razak and corruption allegations involving 1MDB.

But, in October, the Malaysian government bonds saw inflows of $543 million, and foreign reserves stood at $97.8 billion at the end of that month, up from $97.7 billion at the end of September.

The ringgit slump impacted other local markets on Friday. Malaysian palm oil futures, priced in ringgit, rose to the highest in over four years, but the benchmark stock index dropped 1 percent.

($1 = 4.2800 ringgit)

(Additional reporting by Ewen Chew in Singapore; Writing by A.Ananthalakshmi; Editing by Simon Cameron-Moore)

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