The Gloomy Ringgit

Summary

  • The Ringgit lost approximately 2% week-on-week against the US Dollar.
  • Therisk-off sentiment expanded globally, hurting Emerging Market(“EM”) currencies.
  • Outflows from bond markets exacerbated the weakness in the local currency.

Commentary

The Ringgit lost approximately 2% week-on-week against a strong US Dollar following Donald Trump’s surprise win in the US Presidential Elections.

This was not just a Malaysian phenomenon, as a risk-off sentiment shockwave was sent globally, hurting Emerging Market (“EM”) currencies as markets attempted to assess the impact of the next US president’s pro-growth fiscal policies coupled with his intention for stricter trade deals.

The US Treasury (“UST”) yield curve began steepening at a rapid pace as investors’ expectations were stoked by expansionary fiscal policy taking over from what has been a loose monetary policy for the longest time. The 10-year UST yield rose to 2.15%; a move of more than 40bps in the two days following the results of the elections. Within the same time frame, we have seen Malaysian bond yields rise by almost 30bps across the curve, practically mirroring the movement in USTs. After having seen strong foreign participation into the local bond market over the year, we noted foreign selling interest this time around.

We think that these movements are dictated by the unwinding of the carry trade, of which there is heavy and profitable positioning through the year. Though still unquantifiable at the time of writing, the outflows from the bond market has exacerbated the weakness in the Ringgit as investors reduced their positions in both the bond market and our local currency.

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