Ringgit weakens on possible bond exclusion in WGBI

From a technical standpoint, the ringgit appears to be at an oversold position, says economist


THE ringgit has weakened to the lowest since Jan 25, 2019, against the US dollar.

At 5pm yesterday, the local currency stood at RM4.136 against the greenback. It opened at RM4.134, and had been moving between RM4.133 and RM4.145 during the day.

Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said the main reason for the decline was none other than the possible exclusion of Malaysian bonds in the FTSE Russell’s World Government Bond Index (WGBI).

“We saw the 10-year Malaysian Government Securities (MGS) yield rose four basis points (bps) to 3.814%, suggesting selling activities in the MGS market. The three-, five-and seven-year MGS were also higher between 3bps and 5bps on Tuesday.

“By extension, the ringgit against the US dollar was weaker, perhaps reflecting some sell-down by the foreign investors,” he told The Malaysian Reserve when contacted.

He said from a technical standpoint, the ringgit appears to be at an oversold position, which means a technical rebound could happen at some point.

Mohd Afzanizam explained that China’s better than expected GDP, the US rates to remain status quo and the revival of the East Coast Rail Link project could, in theory, help lift the ringgit.

“But at this juncture, market uncertainties continue to take centre stage,” he said.

SPI Asset Management managing partner and head of trading Stephen Innes said in a note yesterday that the ringgit has weakened substantially on news the FTSE Russell is considering dropping Malaysian bonds.

He said foreign bond inflows have been buttressing the ringgit of late as the market has started to price in the possibility of a Bank Negara Malaysia rate cut at the next policy meeting after economic conditions weakened amid inflation.

“We witnessed an unwinding of new bond inflows which is having a pronounced effect on local currency markets due to shallow pockets of liquidity and, of course, as the market bias for weaker ringgit kicks in.

“However, even if the exclusion does occur, it should not have any discernible effect on the credit ratings. So, despite this unexpected shocker, it’s likely a bit overdone and I would expect cooler heads to prevail, but only time will tell if this level offers a significant value play or just a value trap,” he noted.