Pressure on ringgit remains unabated

At RM3.85 to the US dollar, the selling pressure on the ringgit remains unabated on the back of two probable developments – first, the widely speculated put option that traders had gone into a few months ago offering RM4 for every US dollar.

The second is the arbitrage difference between the non-deliverable forward (NDF) ringgit offshore contract versus the onshore ringgit forward contract.

As of yesterday, the one-month NDF offshore had an implied yield of 8.2% versus the onshore forward yield of 3.2%.

“That’s a very decent arbitrage yield of some 5%. This is clearly another channel of pressure for the ringgit,” said Dr Suresh Ramanathan, an independent interest rate and foreign exchange strategist.

An NDF contract is a short-term forward contract where the profit or loss is calculated based on the difference between the forward rate and spot rate. It is settled in US dollars and the tenure can be one month or up to one year.

Since the ringgit is not available in large amounts in the offshore market, the NDF is the common benchmark used to speculate the currency.

Yesterday, the ringgit hit a fresh 17-year low of 3.8517 against the greenback. Year-to-date, the ringgit has lost about 8.4% against the US dollar, making it the worst-performing currency in Asia.

Suresh is, however, not overly pessimistic about the ringgit’s depreciation, as he is of the opinion that beyond the RM3.70 level, a lot of the selling pressure was purely due to arbitrage opportunities and the currency will eventually revert once the arbitrage window in both the forward and options market closes.

Last week, it was reported that Bank Negara was attempting to stem the decline of the ringgit by persuading traders to not enter into forward contracts to sell the ringgit.

“The message was to go long on the ringgit and short the US dollar,” said a trader.

This comes as dealers get offers to enter into a “put” option for the ringgit at RM4 to the US dollar over a period of between three and six months.

This means that the counter party has taken the view that the ringgit will go to RM4 against the US dollar in three months and is prepared to take delivery from the dealer at that price when the time comes.

Nonetheless, over the near term, there is still risk for the ringgit, for instance, the high bond holdings by foreigners.

Should the ringgit continue to weaken, this could be a third channel of pressure, as foreigners may start selling off their ringgit-denominated bonds.

The foreign shareholding on the ringgit bond market, via the Malaysian Government Securities (MGS), remains high. With the value of the ringgit depreciating by the day, the 3% to 4% yield that foreigners are getting from the MGS is significantly being eroded.

As at end-June, foreign ownership of MGS stood at 47%, or US$43bil (RM165.55bil) of the total outstanding of US$92bil (RM354.2bil).

“The signal this sends is that the foreigners holding the bonds are still comfortable with the ringgit risk,” said a dealer.

It will be interesting to see Malaysia’s current account position when Bank Negara announces Malaysia’s second-quarter gross domestic product (GDP) later this month.

Economists are forecasting the current account surplus to narrow mainly because Malaysia’s main exports will be hit both by the weak ringgit and lower oil and commodity prices. Oil-related products make up more than 20% of Malaysia’s exports.

On the other hand, Malaysia’s import bills will increase due to the strengthening US dollar. Furthermore, Petroliam Nasional Bhd, which contributed some 22% to national coffers last year, has built its 2015 budget based on oil prices of US$55. As of yesterday, Brent was trading at US$51.03.

Malaysia’s revised Federal Government budget is also based on Brent crude oil at US$55 per barrel

In the first quarter, Malaysia’s overall current account advanced to RM10bil (or 3.6% of GDP). That compares with RM5.7bil (or 2% of GDP) in the fourth quarter of 2014.