The diverging economic fortunes of two Southeast Asian neighbors are prompting PineBridge Investments to favor Malaysia’s ringgit over Singapore’s dollar.
The ringgit has gained 4 percent to 2.53 per Singapore dollar since reaching a 16-year low of 2.63 in February, data compiled by Bloomberg show. Malaysia’s five-year government bonds offer investors a yield almost three times that available on the city-state’s similar debt after Zeti Akhtar Aziz became Southeast Asia’s first central bank governor to raise borrowing costs this year.
“There is a strong, underlying trend supporting the Malaysian ringgit against the Singapore dollar,” Anders Faergemann, who helps oversee $4.3 billion of emerging-market debt as senior fund manager in London at PineBridge, said in an Aug. 15 e-mail interview. “We believe the currency pair has room for a wider correction before year-end.”
The ringgit posted the biggest gains against the U.S. dollar of 31 major currencies tracked by Bloomberg in the past three months as surprisingly strong economic growth prompted traders to start pricing in two more rate increases by Zeti in a year. Barclays Plc and Commonwealth Bank of Australia recommend using the Singapore dollar as a funding currency to buy the ringgit, which has Asia’s best carry-trade returns on a Sharpe ratio basis of 2 in the past six months.
Malaysia’s $312 billion economy expanded 6.4 percent in the three months through June, the fastest pace in six quarters, the government reported last week. That was more than the 5.8 percent median forecast in a Bloomberg survey and sent the ringgit to a nine-month high against the U.S. dollar.
Singapore’s growth is trailing at 2.4 percent. The currency, which is used as the city-state’s key monetary policy tool, climbed 0.5 percent versus the greenback in the past three months, ranking it fifth among the 31 exchange rates tracked by Bloomberg and behind the ringgit’s 1.8 percent gain.
Strategists have increased their year-end ringgit forecasts for four straight months, the longest for any other Southeast Asian currency. The median estimate is 3.24 per U.S. dollar. It traded at 3.1525 as of 10:56 a.m. in Kuala Lumpur.
For Dave Wong, a 27-year-old Malaysian working in Singapore for the past four years, the ringgit’s strength against the city’s currency may be the catalyst for him to return home. He repatriates 1,000 Singapore dollars a month to his parents, and any further gains will persuade him to look for work again in Malaysia as a food industry researcher, he said.
“If the exchange rate drops below 2.5, then the salary I get in Malaysia is comparable to what I earn in Singapore,” Wong, who currently works at a food outlet in the central business district, said in an interview yesterday. I can get more than 4,000 to 5,000 ringgit in Malaysia. Expenses are also higher in Singapore.’’
Malaysia’s five-year government bonds offer a yield of 3.73 percent, compared with 1.25 percent for comparable debt in Singapore, according to data compiled by Bloomberg. The notes returned 0.8 percent in the past three months versus 0.4 percent in the city state. In a carry trade, investors borrow in a country with low interest rates and park the funds elsewhere seeking higher yields.
Wong Chee Seng, a foreign-exchange strategist at AmBank Group in Kuala Lumpur, said the drop in Singapore’s dollar provides a buying opportunity because of its safe-haven status as the Federal Reserve prepares to start raising interest rates.
Singapore, the world’s third-largest foreign-exchange market after London and New York, is rated AAA by Standard & Poor’s. That’s the highest investment grade and six levels above Malaysia. Singapore had almost $274 billion of foreign-currency reserves at the end of July, compared with $132 billion in Malaysia.
One-month implied volatility for the Singapore dollar was 2.99 percent, compared with 5.35 percent for the ringgit, according to data compiled by Bloomberg. The gauge is a measure of exchange-rate swings used in pricing options, with a higher number showing more risk.
“It is definitely time to buy some Singapore dollars,” Wong said in an Aug. 14 phone interview. “Once quantitative easing ends and volatility starts to pick up, I doubt the ringgit will have that honeymoon period.”
Singapore’s slower growth and the central bank’s inflation fight have made the currency a favored funding conduit, according to Hamish Pepper, a foreign-exchange strategist at Barclays.
Inflation in Singapore cooled to 1.8 percent in June, while its neighbor’s consumer prices rose 3.3 percent, official data show. Malaysia may report on Aug. 20 that the index used to measure the cost of goods held at the same rate in July, according to the median forecast in a Bloomberg survey.
“Recent activity data from Malaysia and Singapore has supported our short Singapore dollar/Malaysian ringgit trade, and we continue to target 2.5277,” Singapore-based Pepper said in an e-mail yesterday.
Singapore uses the exchange rate to guide monetary policy rather than interest rates. The Monetary Authority of Singapore may allow more weakness after data yesterday showed non-oil exports contracted for a third month in July, Pepper said.
In what is likely to support Malaysia’s currency further, one-year interest-rate swaps have climbed to 3.77 percent, extending the gap over the central bank’s 3.25 percent overnight policy rate, which Zeti increased in July for the first time since 2011.
“There is still potential for the ringgit to appreciate against the Singapore dollar,” Suresh Kumar Ramanathan, a regional currency strategist in Kuala Lumpur at CIMB Investment Bank Bhd., said in an Aug. 14 phone interview. “There’s a high chance Bank Negara will raise policy rates by another 25 basis points in September and that could provide the ringgit with further strength and overshoot 2.5 per Singapore dollar.”