Malaysia’s ringgit headed for its biggest weekly drop since May and sovereign bonds declined on speculation Prime Minister Najib Razak will call an early general election that may weaken the coalition’s grip on power.
Najib, who has embarked on a $444 billion 10-year program to build railways, roads and power plants, must dissolve parliament by April 28 and is aiming to restore a two thirds majority ceded in 2008. His approval rating dropped to the lowest level in 16 months in December, the Merdeka Center for Opinion Research said in a Jan. 10 statement.
“The big driver for weakness in the ringgit has been the election concern and uncertainty,” said Sacha Tihanyi, senior foreign-exchange strategist at Scotiabank in Hong Kong. “It’s going to be difficult to see some stability until we get a little bit more certainty surrounding the election.”
The ringgit depreciated 1.8 percent for the week to 3.1050 per dollar as of 4:26 p.m. in Kuala Lumpur, the biggest loss since the five days ended May 18, according to data compiled by Bloomberg. It retreated 0.7 percent today, the worst performance among 25 emerging-market currencies. Malaysian financial markets are shut tomorrow for a holiday.
The currency touched 3.1150 earlier, the lowest level since Sept. 7 and has slipped 1.5 percent since Dec. 31, the worst month since a 4.6 percent drop in May.
Bank Negara Malaysia was expected to keep its benchmark overnight policy rate at 3 percent when at a review today, according to all 22 economists in a Bloomberg survey. The economy expanded 5.2 percent in the quarter ended Sept. 30 from a year earlier, while euro area gross domestic product contracted 0.36 percent, according to official figures.
The ringgit fell in early trading on concern fund inflows may slow as an economic recovery in Europe deters investors from seeking relatively faster growth in developing countries, said Jonathan Cavenagh, a currency strategist at Westpac Banking Corp. in Singapore.
Economic confidence in the euro area rose more than analysts estimated this month, a European Commission index showed yesterday, adding to signs that the bloc may be emerging from a recession. Global funds held more local-currency government bonds in Malaysia than in Thailand and Indonesia as of November 2012, official data show.
“We’re seeing a lot of talk about safe-haven flows coming out of Asia and the Malaysian bond market is very heavily owned by foreign investors,” Cavenagh said. “With Europe starting to normalize a little bit, the risk-reward of staying in the Malaysian bond market may not be as compelling as what it was six to 12 months ago.”
One-month implied volatility in the ringgit, a measure of expected moves in exchange rates used to price options, rose 80 basis points, or 0.8 percentage point, to 7.30 percent, the highest level since Sept. 4.
The yield on the 3.702 percent notes due February 2013 rose seven basis points, the most since Jan. 9, to 2.99 percent, according to data compiled by Bloomberg. Borrowing costs on three-year securities have climbed 15 basis points to 3.14 percent this year.