Ringgit declines as China seen allowing weak Yuan with new index

[KUALA LUMPUR] Malaysia's ringgit fell to a three-week low as a new China index tracking the yuan against a basket of currencies spurred speculation the exchange rate will weaken.

The move may put pressure on Asian currencies to depreciate as policy makers bid to keep exports competitive with the world's second-biggest economy by allowing their exchange rates to fall, and as the greenback strengthens amid a looming increase in US borrowing costs. The China Foreign Exchange Trade System, run by the central bank, published the index on Friday and it includes 13 other currencies. The dollar has a 26.4 per cent weighting.

"The market took the announcement as the People's Bank of China allowing for more weakness in the renminbi," said Andy Ji, a Singapore-based strategist at Commonwealth Bank of Australia. "That affected some of the regional currencies." The ringgit dropped 0.8 per cent to 4.3240 a dollar in Kuala Lumpur, taking its loss this month to 1.4 per cent, according to prices from local banks compiled by Bloomberg. It earlier reached 4.3325, the lowest since Nov 20. The currency also declined as a protracted slump in Brent crude cuts government revenue for the region's only major net oil exporter.

The yuan index will "help bring about a shift in how the public and the market observe RMB exchange-rate movements," according to an announcement on CFETS website. The euro will have a 21.4 per cent weighting and the yen 14.7 per cent. China's currency dropped 0.3 per cent in offshore trading in Hong Kong, Indonesia's rupiah fell 0.9 per cent and the South Korean won declined 0.4 per cent.

Brent slumped another 1.4 per cent in Asia on Monday to US$37.39 a barrel, the lowest level since 2008 and below Malaysia's 2016 budget assumption of US$48. Malaysia derives about 22 per cent of government revenue from oil-related sources and a report in the New Straits Times last week cited Prime Minister Najib Razak as reiterating the nation will face a US$7 billion shortfall next year due to the drop in energy prices.

The decline in oil "will see further reductions in Malaysia's liquefied natural gas exports whose prices lag oil by around four months," said Khoon Goh, a senior foreign-exchange strategist at Australia & New Zealand Banking Group Ltd in Singapore, the most accurate forecaster of emerging Asian currencies in the four quarters ended Sept 30. "In addition, lower oil prices will make it harder for the government to achieve the 2016 deficit target of 3.1 per cent of gross domestic product." Sovereign bonds retreated, with the yield on the 2020 notes rising five basis points to an 11-week high of 3.86 per cent, according to prices from Bursa Malaysia. The cost to insure the nation's debt from default for five years fell eight basis points to 201 after last week's biggest rise since September, CMA prices show.

BLOOMBERG