Ringgit Declines This Week on Fed Risk, Drop in Trade Surplus

Malaysia’s ringgit posted its biggest weekly loss in five, after the trade surplus fell to the lowest since April and on prospects the Federal Reserve will cut stimulus that’s driven demand for emerging-market assets.

The currency extended losses today after a report showed imports surged more than exports in July, narrowing the trade balance to $2.86 billion versus $4.32 billion a month earlier. The figures add to concern the surplus in the current account, the broadest measure of trade, will shrink from a record low at a time when the ringgit is Southeast Asia’s second-worst performing currency after Indonesia’s rupiah this quarter.

“Worries that the current-account surplus will narrow further are adding pressure to the ringgit,” said Jonathan Cavenagh, a currency strategist at Westpac Banking Corp. in Singapore. “That’s not helping in an environment where there are prospects of potential tapering by the Fed.”

The currency dropped 0.7 percent to 3.3290 per dollar in Kuala Lumpur, taking losses this week to 1.3 percent, data compiled by Bloomberg show. It reached a three-year low of 3.3377 on Aug. 28 and is down 5.1 percent this quarter.

One-month implied volatility, a measure of expected moves in the exchange rate used to price options, rose 89 basis points, or 0.89 percentage point, to 9.97 percent this week.

Subsidy Cuts

Prime Minister Najib Razak announced fuel price increases on Sept. 2 for the first time since 2010 to curb subsidies that have strained the government budget, after Fitch Ratings cut its outlook on the nation’s A- credit rating to negative from stable on July 30. Fitch cited rising debt levels and a lack of budgetary reform for its decision and said Malaysia risks a downgrade in 18-24 months unless it improves the fiscal position.

The effort to rein in subsidies helped fuel a rally in the bond market. The yield on the 3.48 percent government notes maturing March 2023 fell 14 basis points to 3.95 percent this week after rising over the previous 10 days, according to data compiled by Bloomberg.

Malaysia’s imports climbed 6.2 percent from a year earlier in July, compared with a 1.3 percent increase in June, the official data showed, beating the median estimate in a Bloomberg survey for a 0.2 percent contraction. Overseas shipments rose 4.5 percent, after falling 6.9 percent a month earlier.

The current-account surplus shrank 70 percent last quarter to 2.6 billion ringgit ($781 million). Malaysia’s foreign-exchange reserves slid 2.2 percent to $134.8 billion in August from the preceding month, according to a statement from the central bank. Holdings reached $141.4 billion in May, the highest level in data compiled by Bloomberg going back to 1998.

U.S. data later today may bolster the case for the Fed to cut stimulus. Non-farm payrolls climbed 180,000 in August, after increasing 162,000 in July, according to the median estimate of economists surveyed by Bloomberg. The Federal Open Market Committee meets Sept. 17-18 to discuss its debt-purchase program.

“Bets on Fed tapering are the main play right now,” said Zulkiflee Nidzam, head of foreign-exchange trading at Asian Finance Bank Bhd. in Kuala Lumpur.

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