Malaysia’s three-year sovereign bonds had their best week since June as the U.S. government closure spurred speculation the Federal Reserve may delay plans to trim stimulus that has fueled emerging-market inflows.
The U.S. Treasury warned in a report yesterday that a possible default triggered by Congress failing to raise the $16.7 trillion federal debt limit could have catastrophic consequences lasting decades. Malaysia cut fuel subsidies last month and Prime Minister Najib Razak said he will announce more steps in the Oct. 25 budget to address the fiscal deficit.
“The U.S. government shutdown has had an impact on the timing of tapering,” said Vivek Rajpal, a Singapore-based strategist at Nomura Holdings Inc. “Some recent actions in Malaysia such as the fuel price hike suggest the authorities are worried about the fiscal deficit, and hence the market is optimistic that they will be able to take action.”
The yield on the 3.172 percent notes due July 2016 declined nine basis points, or 0.09 percentage point, this week to 3.3 percent as of 5:08 p.m. in Kuala Lumpur, according to data compiled by Bloomberg. That’s the biggest five-day drop since the period ended June 7. The rate fell one basis point today.
The Federal Reserve unexpectedly refrained from reducing stimulus last month, and Atlanta Fed President Dennis Lockhart said yesterday the shortage of economic data due to the government shutdown “would tend to make me somewhat more cautious” about reducing the monthly pace of bond purchases.
Malaysia’s export growth accelerated to an 18-month high of 12.4 percent in August, beating the 4.7 percent gain forecast by economists surveyed by Bloomberg, official figures showed today. The trade surplus widened to 7.1 billion ringgit ($2.2 billion) from 2.9 billion ringgit previously.
“Any surplus number definitely is a big plus for Asian currencies,” said Wong Chee Seng, a currency strategist at Ambank Group in Kuala Lumpur.
Prime Minister Najib increased prices of gasoline and diesel on Sept. 3 to rein in the government’s budget shortfall. The move will help save about 1.1 billion ringgit this year and 3.3 billion ringgit annually in the future by reducing state subsidies, he said.
The ringgit strengthened 1.4 percent this week to 3.1827 per dollar, according to data compiled by Bloomberg. The currency rose 0.4 percent today. One-month implied volatility, a measure of expected moves in exchange rates used to price options, rose 46 basis points this week to 10.7 percent. It fell four basis points today.
The ringgit has room to strengthen due to improving growth expectations in China in the near term and because of Bank Negara Malaysia’s shift to “a slight hawkish bias,” Citigroup Inc. strategists including Siddharth Mathur in Singapore wrote in a note yesterday.