Malaysia’s ringgit headed for its worst month since May 2012 as the prospect of the Federal Reserve phasing out stimulus that has boosted the supply of dollars cut demand for the nation’s assets.
The currency touched the weakest level in almost three years after Fed Chairman Ben S. Bernanke said June 19 that $85 billion a month of bond buying will probably be tapered this year and ended in 2014 as long as the U.S. economy performs in line with its projections. The yield on five-year government bonds was set for its biggest monthly increase since March 2011, while the cost to insure them against default touched the highest level since January 2012 this week.
The ringgit declined 2.8 percent this month and 0.3 percent today to 3.1831 per dollar as of 9:41 a.m. in Kuala Lumpur, according to data compiled by Bloomberg. The currency touched 3.2222 on June 24, the weakest since July 2010, and has lost 2.8 percent this quarter.
“What we’re seeing is that the world has to start learning to live with less quantitative easing,” said Jimmy Koh, the head of research at United Overseas Bank Ltd. in Singapore. “Countries like Malaysia and Indonesia have been the main beneficiaries of liquidity flows globally.”
Overseas investors held 32 percent of Malaysian sovereign debt at the end of April, the latest official data show. The cost of insuring the country’s debt using five-year credit-default swaps rose 30 basis points to 119 this month through yesterday, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market. The rate touched 147 on June 24, the highest since January 2012.
Any decision to reduce the pace of asset purchases wouldn’t represent a withdrawal of stimulus, and an increase in the Fed’s benchmark interest rate is “very likely to be a long way off,” Federal Reserve Bank of New York President William C. Dudley said in remarks prepared for delivery yesterday.
The yield on the 3.26 percent bonds due March 2018 climbed 23 basis points in June to 3.51 percent, according to data compiled by Bloomberg. The yield fell two basis points, or 0.02 percentage point, today, paring its quarterly advance to 29 basis points.
One-month implied volatility in the ringgit, a measure of expected moves in exchange rates used to price options, rose 1.53 percentage points this month to 9.34 percent and increased 24 basis points today.
To contact the reporter on this story: Liau Y-Sing in Kuala Lumpur at firstname.lastname@example.org