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(September 7): The Malaysian ringgit has defied the odds to outperform most of its Asian peers. Investors will now be watching to see if it survives the September trials.
A three-month rally in the currency could come to a halt when the FTSE Russell announces a decision on whether to hold ringgit bonds on its World Government Bond Index. Less risk is also brewing in the form of an expected rate cut by Bank Negara Malaysia.
The surprising strength of the ringgit in the face of months of political turmoil has been a vote of confidence for Prime Minister Tan Sri Muhyiddin Yassin, who seeks to revive spending to lift the economy out of its biggest recession since 1998. If Malaysia’s bonds are scrapped from the FTSE index, debt inflows could be depleted, depriving the currency of a key source of support.
Like most of its Asian peers, the ringgit has benefited from a weak dollar and strong demand for higher yielding debt. It has gained more than 3% since the beginning of July to outperform all but one of its Asian peers.
The ringgit bullishly broke resistance at its March high against the dollar, and may head towards 4.05 before the end of the year. The coin was trading at 4.1475 on Friday.
But what happens from here would largely depend on the FTSE decision, which is due on September 24. Goldman Sachs Group Inc. said last year that outflows could reach $ 6 billion if the nation is eliminated.
“We continue to see a higher likelihood of status quo, that is, no change in rankings and weights,” MUFG Bank Ltd. analysts led by Derek Halpenny wrote in a report last week, referring to the FTSE decision. “This means that foreign investors can continue to buy Malaysian sovereign bonds, especially as real yields remain the highest in the region, albeit on a downward trend.”
Investors will also be on the lookout for Bank Negara Malaysia’s policy meeting on Thursday, with four of 14 economists in a Bloomberg survey expecting a 25 basis point cut. The remaining 10 do not see any change.
In its latest review on July 7, the central bank said it would “continue to use its policy levers as appropriate” to support growth, fueling speculation of further relaxation.
Below are key Asian economic events and data expected this week:
- Monday September 7: China’s trade balance, Indonesia’s foreign exchange reserves
- Tuesday September 8: Australia business confidence, Japan labor cash earnings, current account balance of payments and second quarter GDP
- Wednesday 9 September: Australia consumer confidence and mortgage loans, New Zealand business confidence and second quarter manufacturing activity, China CPI and PPI, South Korea unemployment rate
- Thursday 10 September: Bank Negara Malaysia Interest Rate Decision; Australian consumer inflation expectations, New Zealand credit card spending, Japan core machine orders, Philippines trade balance
- Friday September 11: New Zealand Manufacturing PMI, Japan PPI, Malaysia and India Industrial Production
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