Trades in which investors borrow in a country with low interest rates and park funds elsewhere seeking higher yields climbed 2.8 percent in Malaysia in the past three months, exceeding the 1.9 percent gain for the Philippine peso and 1.8 percent for China’s yuan, data compiled by Bloomberg show. Barclays Plc and Bank of America Merrill Lynch are predicting one more rate rise this year of 25 basis points.
Interest-rate swaps have advanced to 3.71 percent since Bank Negara Malaysia raised it benchmark rate for the first time in three years to 3.25 percent in July, becoming Southeast Asia’s first central bank to tighten policy in 2014. Analysts have increased their year-end ringgit forecasts for four straight months, more than any other Southeast Asian currency.
Goldman Sachs Group Inc. is favoring the ringgit because of the central bank’s monetary policy stance and as Malaysia benefits from strong growth in China, the nation’s second-largest export market. Goldman raised its six-month forecast for the currency last month to 3.10 per dollar from 3.23, while Bank of America sees it appreciating to 3.15 by end-September.
Ten of 15 economists surveyed by Bloomberg see Bank Negara Governor Zeti Akhtar Aziz boosting interest rates to 3.5 percent by year-end, while five expect no change. There are two more meetings in 2014 on Sept. 18 and Nov. 6. The median estimate for the ringgit is 3.22 by the end of the fourth quarter, stronger than 3.32 at the end of March. It was at 3.2020 in Kuala Lumpur yesterday.
Malaysia’s inflation reached 3.3 percent in June, exceeding the central bank’s benchmark rate for a seventh month. A goods and services tax of 6 percent due to be implemented in April could push price increases above 4 percent, according to a July 25 report by Credit Suisse Group AG analyst Ashish Agrawal in Singapore.
The World Bank forecasts Southeast Asia’s third-largest economy will expand 5.4 percent this year, Ulrich Zachau, its country director, told reporters in Putrajaya, outside Kuala Lumpur on June 27. That compares with growth of 4.7 percent last year and the 5.3 percent median forecast in a Bloomberg survey.
“Malaysia has some of the best economic growth in the region and the most hawkish central bank,” Hamish Pepper, a strategist at Barclays in Singapore, said in an interview on Aug. 1. “On the back of that as well, are rising inflationary pressures. What that really means is this is a central bank who should be comfortable to allow the currency to appreciate.”
Inflation will probably remain above the long-run average, according to a central bank statement that also cited ‘firm growth prospects’’ issued after policy makers raised the benchmark rate by 25 basis points to 3.25 percent on July 10.
The extra yield investors demand to hold three-year Malaysian government bonds over similar-maturity U.S. Treasuries has widened eight basis basis points, or 0.08 percentage point, to 259 since May 8. The central bank said the same day that monetary policy will have to be adjusted to check financial imbalances. The yield spread compares with 228 basis points in the Philippines.
Even if the U.S. boosts borrowing costs, Malaysia’s rate gap will remain when the central bank is also raising rates, Wong Chee Seng, a currency strategist at AmBank Group in Kuala Lumpur, said in an Aug. 1 phone interview.
“Given that Malaysia will be in a tightening mode, an increase in borrowing costs in the U.S. would make the interest-rate differential less glaring and this should give support to the ringgit,” Wong said. “Otherwise, it would not be profitable to do the carry trade.”
Overseas funds continue to buy Malaysian sovereign bonds, taking their total holdings to 46.7 percent in June from 46.3 percent in May, a report from BNP Paribas SA showed on Aug. 4, citing EPFR Global data.
Barclays is recommending investors buy the ringgit using the Singapore dollar as a funding currency, targeting 2.5277 compared with 2.5676 in Kuala Lumpur yesterday, data compiled by Bloomberg show. The nation’s current account is also supportive of the ringgit, said the bank’s Pepper.
The balance in the broadest measure of trade has been in excess since at least 1999, data going back to that date compiled by Bloomberg shows. It was at 19.8 billion ringgit ($6.2 billion) in the first quarter.
“We expect the ringgit to outperform its regional peers given strong growth momentum, a continued current-account surplus and another 25 basis point rate hike from BNM this year in response to growing inflation pressures,” Pepper said.
To contact the reporters on this story: Lilian Karunungan in Singapore firstname.lastname@example.org; Elffie Chew in Kuala Lumpur at email@example.com
To contact the editors responsible for this story: Amit Prakash at firstname.lastname@example.orgSimon Harvey, Andrew Janes