New appeal for ringgit, a currency of choice for carry-trade

  • Forex
  • Monday, 21 Aug 2017

Outflow risk: Currency traders stand to gain if the ringgit appreciates. The downside for carry-trade is when traders start unwinding when interest rates change, causing an outflow of funds.

PETALING JAYA: The ringgit is seeing rising optimism due to the stronger-than-expected economic performance and reduced volatility of the currency.

The reduced volatility has positioned the ringgit as a favoured currency for carry-trade.

“The Indonesian rupiah and the ringgit are two currencies that are least volatile and the country’s debt papers offer high yields. The reduced volatility has made it ideal for those undertaking currency trades,” said a currency strategist.

Currency trades are done by traders where they borrow in low yielding currencies and invest in high-yielding ones. The ideal condition is for both currencies to have low volatility.

Currency traders for instance borrow in yen where interest rate is low and invest in ringgit debt papers, which carries a higher yield due to the relatively higher cost of ringgit funds. Apart from the yield on the debt paper, if the ringgit appreciates, the currency traders stand to gain on the appreciation.

The downside for carry-trade is when the traders start unwinding when interest rates change. This causes an outflow of funds as traders unwind their ringgit holdings to close their outstanding positions in the currency market.

Foreigners have started nibbling ringgit and rupiah denominated debt papers in the last few months as both currencies were least volatile and offered higher yields compared to others in the region.

According to data, the one-month implied volatility of the ringgit now is about 5.67%. This is a significant improvement as the implied volatility was double-digit towards the end of last year, especially after the dollar strengthened following the election of Donald Trump as the US president.

The volatility has reduced largely because of measures taken by Bank Negara to minimise the trading of the ringgit in the non-deliverable forward (NDF) market.

The rupiah’s volatility has also reduced and the country has attracted some US$8.3bil in inflows between January and July this year, according to a Bloomberg report.

As for Malaysia, investment in stocks and bonds have improved dramatically in the second quarter, with portfolio inflows rebounding to RM16bil, compared with outflows of RM31.9bil in the first quarter, according to data from MIDF Research.

“Declining foreign-exchange volatility for the rupiah and the ringgit increases the attractiveness of carry from a foreign investor’s perspective,” Divya Devesh, Asia foreign-exchange strategist at Standard Chartered Plc in Singapore told Bloomberg.

“Valuations are very attractive for the ringgit, while high volatility-adjusted carry should keep the rupiah supported.”

The ringgit has traded between 4.25 and 4.30 against the US dollar since the end of May, compared to the last two months of last year where it was between 3.85 and 4.49 against the dollar.

The rupiah traded in a range of just 1.3% in the second quarter, versus a quarterly average of almost 9% since 1991.

The ringgit was last traded at 4.29 against the US dollar on Friday, up 4.4% for the year.

Rakuten Trade head of research Kenny Yee has so far come out with the most bullish of predictions for the ringgit, projecting it to trade at the 4.00 level against the US dollar by the end of the year.

“We expect foreign funds to take advantage of the weak ringgit,” Rakuten Trade head of research Kenny Yee told the audience at the StarLIVE session Investing in Small Mid-Caps: Unearthing the Jewels on Saturday.

Yee joins a chorus of research houses who are expecting the local currency to appreciate against the US dollar. Among the research houses is Credit Suisse that has set a target of 4.10 for the ringgit against the dollar in the coming months.

Strong economic growth and a rising influx of foreign funds flowing into the market are expected to shore up sentiment on the ringgit during the second half of the year.

The economy expanded at its fastest pace in two years during the second quarter, accelerating by 5.8% in the April to June period, helped by robust domestic consumption and surging exports.

This expansion of the economy in the second quarter has prompted Bank Negara on Friday to lift its official growth forecast for the year to above 4.8%.

MIDF Research, in recent report, said the net inflow of foreign funds into the stock market was more than RM10bil.

“This spillover of funds into the market should benefit small cap stocks,” Yee said.

The returning flow of funds from overseas had propelled the FBM KLCI 8.2% higher year-to-date, while Small Cap Index outperformed with a 15.7% rise over the same period.

Despite small cap stocks’ stronger performance, their valuation remained inexpensive at 13 times their projected earnings compared with the broader market valuation of 16 times.

With corporate earnings growth projected at 6% this year, Rakuten expects the FBM KLCI to hit 1,850 points this year.

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