Ringgit rallies with stocks as oil boosts sentiment before Fed

[KUALA LUMPUR] Malaysia's ringgit gained the most in five months and the benchmark stock index closed at a six-week high after an overnight surge in Brent crude eased concern that finances will deteriorate for Asia's only major oil exporter.

The ringgit climbed 1.3 per cent to a two-week high of 4.2545 a dollar in Kuala Lumpur, prices from local banks compiled by Bloomberg show. That's the biggest advance for this year's worst-performing Asian currency since April 24. The FTSE Bursa Malaysia KLCI Index of shares rose 2.1 per cent. Brent crude rallied 6.7 per cent on Wednesday, the steepest increase in more than two weeks.

Asian markets were also driven higher as odds for a US interest-rate hike later Thursday fade. Malaysia's central bank Governor Zeti Akhtar Aziz said the country faces a "very challenging" period that it's been able to manage so far and the ringgit's decline has been affected by many factors including domestic ones, according to a report in the local New Straits Times newspaper. The nation isn't headed for a crisis, she said. A demonstration by pro-government supporters on Wednesday passed relatively peacefully.

"The dollar is on the backfoot because analysts are coming around to the notion that the Federal Reserve may not hike tonight," said Sim Moh Siong, a currency strategist at Bank of Singapore Ltd. "That's provided relief for emerging-market currencies, plus the fact that oil prices have rallied."

The ringgit and Indonesia's rupiah - Asia's second worst- performing currency this year - are now looking the most attractive in emerging markets based on exchange-rate valuation metrics, Jens Nystedt, managing director at Morgan Stanley Investment Management, said in a phone interview from Jakarta on Wednesday. The firm also favors government bonds in those countries, he said.

Prime Minister Najib Razak has come under pressure to step down over a financial scandal. While rallies across Kuala Lumpur mainly passed without incident, police fired water cannons to disperse government supporters known as Red Shirts on Wednesday as a group tried to enter the capital's Chinatown, fueling concern over race relations. Markets reacted with a "little bit of a euphoria" as some people had anticipated a less-than- peaceful rally, said James Lau, a Kuala Lumpur-based investment director at Pheim Asset Management Asia.

The KLCI has risen about 5 per cent in the past three days. The gauge closed at a three-year low on Aug 24 amid an exit from emerging markets as Chinese growth slowed and investors prepared for higher US interest rates.

Stocks jumped on Sept 14 after Mr Najib said the government will use its ValueCap Sdn fund to support the nation's equities with an injection of as much as RM20 billion (US$4.7 billion).

The rally in stocks has "basically been driven by a surge in oil prices overnight," said Geoffrey Ng, director at Fortress Capital Asset Management Sdn in Kuala Lumpur overseeing about RM1 billion.

"Being an oil- exporting nation, any positive movement in oil is generally good - the correlation with the Malaysian market is quite positive."

While the ringgit's gain trimmed September's loss to 1.4 per cent, it is still down 24 per cent in the past year. The price of Brent crude has halved in 12 months, helping drive the currency to its lowest level in more than 17 years.

Futures show 32 per cent odds that the Fed will move on Thursday, and a bigger 46 per cent chance for an October increase. The likelihood for December is 63 per cent. The Bloomberg Dollar Spot Index was little changed late in Asia after Wednesday's 0.4 per cent decline.

Malaysia's sovereign notes climbed. The five-year yield fell three basis points to 3.82 per cent, according to prices from Bursa Malaysia. The nation's local-currency bonds have returned 0.2 per cent in the past month, while Indonesia's have lost 3.1 per cent, Bloomberg indexes show.

BLOOMBERG