Ringgit Forwards Rally This Week With Bonds as Budget Unveiled

Ringgit forwards posted the biggest weekly gain in two months as Prime Minister Najib Razak reiterated his commitment to cut the fiscal deficit after raising fuel prices last week.

Najib said in his budget speech in Kuala Lumpur today that a new consumption tax to be introduced in April will generate an estimated 23.2 billion ringgit ($7.1 billion) in revenue this year. The government predicts the fuel-price increase will lower the fiscal shortfall to 3.5 percent of gross domestic product in 2014 from 3.9 percent last year.

“The budget is a domestic positive,” Nizam Idris, head of strategy for fixed income and currencies at Macquarie Bank Ltd. in Singapore, said before the budget announcement. “Last week’s fuel-price increase cements expectations that the Malaysian government is committed to fiscal reforms.”

One-month non-deliverable forwards rose 0.6 percent to 3.2659 per dollar this week as of 5:34 p.m. in Kuala Lumpur, the biggest gain since the period through Aug. 15, according to data compiled by Bloomberg. The contracts fell 0.6 percent today and the spot declined 0.4 percent at the close to 3.2578.

Malaysia’s currency rallied 0.9 percent yesterday, leading Asian gains in its biggest advance since April, partly in reaction to investors paring bets for Federal Reserve rate increases and pre-budget optimism.

Bonds Rise

Malaysia raised its 2014 growth forecast to 5.5 percent to 6 percent, compared with the central bank’s projection of 4.5 percent to 5.5 percent in March, according to the Ministry of Finance’s 2014/2015 economic report today.

The central bank has forecast the implementation of the 6 percent goods and services tax will spur inflation, which the finance ministry said in its report will be at 4 percent to 5 percent in 2015, compared with an average of 3.3 percent in the first eight months of this year.

The fuel-price rise will save up to 1.5 billion ringgit this year and as much as 7 billion ringgit in 2015, Rahul Bajoria, a Singapore-based economist at Barclays Plc, wrote in an Oct. 2 note. The central bank is likely to raise its key rate by 25 basis point from 3.25 percent in the first quarter, he said.

The nation’s factory output rose 6.5 percent in August from a year earlier versus a revised 0.6 percent pace in July, the government reported today. The median estimate of economists in a Bloomberg survey was for a 5.1 percent increase.

One-month implied volatility in the ringgit, a measure of expected moves in the exchange rate used to price options, dropped 66 basis points, or 0.66 percentage point, to 7.06 percent from Oct. 3 and rose two basis points today.

Government bonds climbed for a fourth week, with the yield on the 4.181 percent notes due July 2024 declining four basis points to 3.84 percent, the lowest level since the debt was sold in January, according to data compiled by Bloomberg.

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