Ringgit drops most since Brexit on Turkey, Fed rate rise chances

[KUALA LUMPUR] Malaysia's ringgitdropped the most since the UK voted to leave the European Union after Turkey's failed coup and better-than-expected US retail sales bolstered demand for the dollar.

The currency fell the most since June 24 as Asian markets reacted to Friday's attempt by a military faction to seize control from President Recep Tayyip Erdogan. The ringgit rallied last week along with government bonds after the central bank unexpectedly cut interest rates for the first time in seven years. Inflation data in two days may support the case for further easing.

The ringgit declined 0.8 per cent to 3.9775 versus the greenback in Kuala Lumpur as the Bloomberg Dollar Spot Index extended Friday's gains. While futures show odds of a US rate increase by December have picked up, traders see a greater chance of a hike coming in 2017. Extended trading for Malaysia's currency began on Monday, with the onshore market closing one hour later at 6 pm.

"We're seeing Asian currencies weaker because of the dollar," said Irene Cheung, a foreign-exchange strategist in Singapore at Australia & New Zealand Banking Group Ltd.

"The market has priced in slightly more for the rate hike next year in response to the numbers that we saw last Friday. I'm not sure whether the Turkey situation has really stabilized, and if there's any concern it should be good for the dollar."

Turkey's lira rallied 1.8 per cent, after slumping 4.6 per cent on Friday in the wake of the failed coup. The Borsa Istanbul 100 Index of shares tumbled 5 per cent on Monday.

Malaysia's second-largest pension fund plans to buy more longer-dated bonds to hedge against another rate cut. Kumpulan Wang Persaraan (Diperbadankan), which manages about RM120 billion (S$40 billion), expects lower returns this year and is seeking to increase purchases of debt with maturities of 10 years or more, Chief Executive Officer Wan Kamaruzaman Wan Ahmad said in an interview.

Bank Negara Malaysia lowered the overnight policy rate by a quarter point to 3 per cent on Wednesday amid cooling inflation. The ringgit rallied 2.2 per cent for the week. Consumer prices rose 1.7 per cent in June from a year earlier, the slowest pace in more than 12 months, according to the median estimate in a Bloomberg survey before data on July 20.

Malaysia can absorb external shocks should the global economy deteriorate, central bank Governor Muhammad Ibrahim said in an interview with the official Bernama news agency. The central bank has no intention to damp private consumption as the economy still depends on domestic demand, Mr Muhammad said.

Malaysia's 10-year bond yield was little changed at 3.57 per cent, the lowest level for a benchmark of that maturity since 2013. The three-year yield was also steady at 2.88 per cent.

BLOOMBERG