PETALING JAYA: The ringgit has strengthened against the US dollar and other major currencies on expectations of an interest rate hike this week.
The ringgit has gained 1.25% against the greenback in the past one week and closed at 3.171 from 3.211 at end-June, as the market bet that Bank Negara would raise the benchmark overnight policy rate (OPR) by 25 basis points (bps) following a policy meeting tomorrow.
It is the second best-performing currency in Asia so far after Indonesia’s rupiah, which has gained about 2.14% against the US dollar over the same period.
The OPR has stood at 3% since May 2011 after three successive hikes totalling 75 bps in 2010.
Analysts told StarBiz that foreign capital had been flowing into the country’s bond market, in particular Malaysian Government Securities (MGS), on expectations an interest rate hike could boost returns on their investments.
“In the short term, we expect some buying support (from both domestic and foreign funds) if the central bank raises the OPR,” said CIMB Investment Bank director of regional fixed-income research Nik Ahmad Mukharriz Nik Muhammad.
He added that the resultant foreign capital inflows would boost the prospects of the ringgit over the medium term.
Expectations of a rate hike have been building up since May after Bank Negara said in a statement that financial imbalances remained a concern.
Of the 19 economists polled by Bloomberg, 14 expect the central bank to raise the OPR by 25 bps to 3.25% tomorrow.
According to fixed-income analysts, Malaysia’s bond market had already priced in an interest rate hike after Bank Negara turned hawkishfollowing the May monetary policy committee meeting.
The analysts noted that bond yields with a maturity period of less than five years that were more sensitive to interest rate changes had spiked in May.
In general, an increase in the benchmark interest rate would push down bond prices and increase yields.
In contrast, bonds with maturity periods of more than 10 years that are more susceptible to movements in US Treasuries have been relatively stable in recent months. However, with benchmark rates in the developed markets remaining relatively lower, emerging market yields such as Malaysia’s continue to be more attractive.
Analysts said investors looking for higher returns would view Malaysian 10-year bonds with a yield of 4.02% as attractive compared with similar-maturity US Treasury Bills offering 2.62% and German bunds offering 1.26%.
“There will definitely be more foreign inflows after Bank Negara is done with the rate hikes,” Aberdeen Islamic Asset Management Sdn Bhd assistant investment manager Edmund Goh said.
However, he said shorter-term bonds would likely face some selling pressure after the first hike, as the market would likely be pricing in a second increase.
Aberdeen expects Bank Negara to raise the OPR twice by 25 bps each round to 3.50% within the next 12 months.
“Investors are resigned to the fact that Bank Negara would raise the benchmark interest rate soon,” Alliance Investment Bank chief economist Manokaran Mottain said. “A higher OPR will only enhance Malaysia’s appeal to foreign investors.”
He, however, remained cautious on the potential selling in the domestic bond market by foreign investors, noting that foreign holdings of MGS remained high compared with the long-term holdings of 30% seen before developed economies launched their quantitative easing, or QE, programmes.
Foreign holdings of Malaysian debt securities rose to RM249.5bil, or 30.3%, at end-May from RM235.9bil, or 28.7%, at end-April, as a result of a higher take-up of MGS, latest data from Bank Negara show.
During the period, foreign holdings of MGS increased RM9.2bil to RM144.7bil, or 46.3% of the total outstanding MGS.Malaysian Rating Corp Bhd (MARC) forecasts “an upside bias” in MGS yields with a bearishly flattening yield curve premised on the expectations of an OPR hike by Bank Negara.
“Nonetheless, we believe that the rise in MGS yields would not be significant in view of the range of stimulus measures the European Central Bank unveiled recently, which might exert a downward pressure on global bond yields,” the rating agency said in a report.
In tandem with its outlook for MGS yields, MARC expects corporate bond yields in Malaysia to continue trending upwards.
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