Ringgit Rebound Predicted as GDP Limits Outflow Concern

Malaysia’s ringgit is poised to rebound from a three-year low as the economy’s resilience damps concern rising U.S. Treasury yields will prompt overseas investors to dump the nation’s bonds, trading patterns show.

The currency has dropped 2.7 percent since June 30 to 3.2463 per dollar, a loss second only to India’s rupee among 23 other emerging-market currencies. The decline pushed the ringgit beyond the limits of the Bollinger band, signaling a reversal may be imminent, data compiled by Bloomberg show. That’s the biggest deviation in developing markets. Stochastic oscillators also showed the ringgit is oversold.

Morgan Stanley predicts Malaysia’s economic growth and current-account surplus, which is more than twice China’s relative to gross domestic product, will help the ringgit catch up with regional peers. The central bank can use its $138 billion of foreign-exchange reserves to support the currency, according to Bank of America Merrill Lynch. GDP is forecast to grow 5 percent this year, after a 5.6 percent gain in 2012, the median estimate in a Bloomberg survey of 21 analysts shows.

“We might be coming close to the end of the weakness cycle in the ringgit,” Rahul Bajoria, a Singapore-based economist at Barclays Plc, said in an interview yesterday. “The current-account surplus still remains quite large, even though it has come off” and domestic demand is driving growth, helping shield the economy from external shocks, he said.

The ringgit’s 5.8 percent loss this year would be its worst annual performance since a 35 percent plunge in 1997, during the Asian financial crisis. It dropped as much as 0.9 percent to 3.2536 per dollar in Kuala Lumpur today, the weakest level since July 2010.

Bond Flows

Fitch Ratings lowered its outlook for Malaysia’s A- credit rating to negative from stable yesterday, citing worsening prospects for cutting government debt levels. The ringgit could underperform as $2.9 billion of sovereign notes mature today, raising the prospect of capital outflows, Dariusz Kowalczyk, a Credit Agricole CIB strategist in Hong Kong, wrote in a research note yesterday.

The currency slid this month on concern global investors, who owned 33 percent of Malaysian government bonds in May, the highest proportion in Southeast Asia, will pull funds out as the U.S. outlines plans to rein in monetary stimulus. The Federal Reserve will conclude a two-day policy meeting today in Washington that may shed light on the timing of such a move.

Ten-year Treasury yields climbed 101 basis points, or 1.01 percentage point, to 2.62 percent since reaching this year’s low on May 1. Malaysia’s 10-year bond yield rose 77 basis points to 4.14 percent in that time.

Outside Band

Technical indicators suggest the ringgit’s decline may have reached the extreme. At today’s level, the ringgit was 0.4 percent weaker than the upper limit of the Bollinger Band. The currency breached its normal trading range this week for the first time in a month.

Bollinger Bands, developed by John Bollinger in the 1980s, are used by technical analysts to identify the turning point in an asset’s trajectory. The limits represent two standard deviations from the 20-day moving average, implying that the likelihood of a currency moving outside the band is rare.

The “k-line” of stochastics, which measures current price relative to highs and lows, has increased to 93, above the 80 threshold deemed as oversold for the ringgit. A dollar-sell signal would be confirmed if the k-line crosses below its own moving average, or “d-line,” which was at 89.

The currency will strengthen 2.4 percent to 3.17 per dollar by the end of December, according to the median of 27 forecasts compiled by Bloomberg.

Debt Levels

BNP Paribas SA predicts rising debt levels will trigger a bond and currency selloff as Prime Minister Najib Razak presses ahead with a 10-year $444 billion spending program aimed at lifting the nation to developed status by 2020. The slowdown in China, Malaysia’s second-biggest export market, is also weighing on the country’s assets, according to the Paris-based lender.

Malaysia’s debt-to-GDP ratio of 53.5 percent is higher than the 25 percent in Indonesia, 51 percent in the Philippines and 43 percent in Thailand, data compiled by Bloomberg show. It’s also approaching the government’s 55 percent limit.

“With China slowing and Fed tapering expected to impact inflows negatively, this will amplify worries over debt sustainability,” Singapore-based BNP analysts Yii Hui Wong and Mirza Baig wrote in a July 29 research note. They cut their year-end forecast for the ringgit to 3.25 per dollar from 3.15.

While Malaysia’s current-account surplus will narrow to 6 percent of GDP this year, from 6.1 percent in 2012 and 12 percent in 2011, it’s higher than the average 2.8 percent in Asian countries and 2.4 percent for China, Bloomberg surveys show.

Ringgit Options

Malaysia’s “fundamentals of a current-account surplus and sustained growth should warrant a correction in the recent weakness in the ringgit,” according to a July 25 report from Morgan Stanley analysts led by Hans Redeker, the head of global foreign-exchange strategy in London.

Bank of America strategists including Christy Tan recommended their clients use options to buy the ringgit, saying the central bank will sell foreign reserves to shore up the currency should the decline deepen.

“We believe that Bank Negara Malaysia is well prepared to defend against a ringgit selloff event,” Tan wrote in a note to clients on July 22. “In the event of a return in appetite for regional bonds, the ringgit is well positioned to outperform in the region.”

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