Malaysia’s ringgit completed the biggest weekly drop since August and bonds rose after the central bank kept the policy rate on hold, just as the US signals it’s moving closer to increasing borrowing costs.
The yield differential between the nations’ debt shrank after Bank Negara Malaysia left its key rate at 3.25 per cent yesterday, after raising it for the first time in more than three years in July. The Federal Reserve boosted the end-2015 projection for its benchmark interest rate by 25 basis points this week.
“The Fed signals a higher rate path, whereas Bank Negara stood pat,” said Choong Yin Pheng, senior manager for bond and economic research at Hong Leong Bank Bhd in Kuala Lumpur. “That’s driving down the ringgit.”
The ringgit weakened 1.1 per cent over the past five days and 0.2 per cent today to 3.2340 per dollar in Kuala Lumpur, according to data compiled by Bloomberg. It earlier fell to a four-month low of 3.2483.
The yield on Malaysia’s three-year sovereign bonds, the most sensitive to the policy outlook, dropped nine basis points, or 0.09 percentage point, to 3.50 per cent. The rate fell 11 basis points for the week, the steepest decline since the current benchmark was sold in March, according to data compiled by Bloomberg.
Malaysia’s 10-year yield has fallen six basis points in two days to 3.94 per cent, while the rate on similar-maturity US Treasuries climbed one basis point to 2.63 per cent.
Bank Negara’s policy decision was predicted by 11 of 21 economists surveyed by Bloomberg, while 10 had forecast a 25 basis-point increase. Export growth slowed to the least in a year in July, while inflation was near the highest level in more than three years in August, data showed this month.
“The prospects are for the Malaysian economy to remain on a steady growth path,” the central bank said in a statement after the review. “Inflation is expected to remain relatively stable for the remainder of the year.”
Credit Agricole CIB predicts the central bank will keep borrowing costs on hold at the November 6 meeting, while ING Groep NV predicts a 25 basis-point increase to “complete the normalization of monetary conditions,” according to research notes today.
The swap market shows investors are paring bets for another increase, as the one-year contracts dropped as much as four basis points to 3.74 per cent in the biggest decline since November 2012, data compiled by Bloomberg show.
One-month implied volatility in the ringgit, a measure of expected moves in the exchange rate used to price options, fell 1.01 percentage points today to 6.93 per cent. The measure dropped seven basis points from September 12.-- Bloomberg