Photographer: Goh Seng Chong/Bloomberg

Malaysian Ringgit to Rally to Eight-Month High, Top Banker Says

  • Sale surge in corporate bonds suggests risk profile is down
  • Fair value for currency should be 3.8 to 4.0 a dollar: banker

The ringgit may advance 4 percent as the latest measures by Bank Negara Malaysia reduce the risks of holding the currency and the economy improves, a member of the central bank’s financial markets committee said.

The currency could reach 4.1 to the dollar in the second half, said Lee Kok Kwan, who is also a director at lender CIMB Group Holdings Bhd. The fair value of the ringgit should be between 3.8 and 4.0, when benchmarked against regional and commodity currencies, said Lee, who accurately predicted in January that the currency will rebound from a 19-year low.

“The macro fundamentals have improved quite a lot, such as GDP and exports," Lee, who is part of the committee tasked to develop strategies for the nation’s bond and currency markets, said in an interview on Wednesday. “Equally as important, the speculative offshore holdings of short-dated ringgit instruments have declined markedly, which eliminates a major source of downside risk to the currency going forward.”

Lee joins a chorus of voices seeking to boost sentiment on Malaysian assets as the central bank relaxes currency hedging rules, after a clampdown on the trading of non-deliverable forwards last November sent investors fleeing. He is more bullish than the consensus analyst estimate, which sees the ringgit weakening to 4.35 against the dollar by the end of the year.

The currency last touched 4.1 in October, and was at 4.264 at 11:00 a.m. local time Thursday. Foreign holdings of debt rose for a second month in May, while the currency has advanced 5 percent this year as confidence improves.

A 45% increase in sales of ringgit corporate bonds this year, and the tightening of Malaysia’s credit-default swaps to less than 100 basis points suggest that the risk profile for the currency has dropped, Lee said.

Bank Negara’s clampdown on NDFs had reduced up to 50 billion ringgit ($11.7 billion) of overseas holdings of short-dated interest-bearing assets, Lee said. A requirement in December for exporters to hold only as much as 25 percent of proceeds in foreign currencies is also helping to sustain bids for the ringgit, Lee added.

To revive confidence, the central bank said in April it will let fund managers handle all of their foreign exchange exposure, up from a limit of as much as 25 percent of invested assets. It will also let domestic investors short-sell government bonds to boost liquidity.

Lee’s view echoes others including Neuberger Berman Group LLC, which said in April that the ringgit may be among the region’s better performers in the coming months. Strategists at Morgan Stanley wrote in a note this month that the currency is among those favored.

What’s boosting their case is Malaysia’s improving economy. Gross domestic product grew 5.6 percent in the first quarter, the fastest pace in two years, while exports expanded 20.6 percent from a year earlier in April.

Lee also made the following points in the interview:

  • Full liberalization of currency hedging in Malaysia negates the need for fund managers and corporates to go offshore to cover ringgit exposure
  • There’s more than 1 trillion ringgit in investments abroad, which are mostly unhedged, and the outsized foreign-exchange gains could disappear as the currency strengthens
  • Risk factors for the ringgit would include a major disruption in North Korea or in the Middle East. Expectations for U.S. interest rate increases have been priced in while commodity prices could fall further and pose a risk to Malaysia
  • Doesn’t see much upside for local bonds as “the ringgit yield curve is almost as steep as the U.S. yield curve, so it’s all priced in”
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