Ringgit Rallies With Bonds, Stocks as Oil Bounce Lifts Sentiment

Malaysia’s ringgit rallied the most in three months as a rebound in Brent crude boosted sentiment following a global selloff in stocks due to slowing growth in China.

The 10-year government bond yield dropped to the lowest since May, interest-rate swaps headed for the biggest one-day decline since 2010 and the cost to insure sovereign notes from default posted the steepest slide in more than a month. Bank Negara Malaysia cut the amount of cash banks must set aside as reserves for the first time since 2009 late on Thursday and opted to keep the benchmark overnight policy rate unchanged to save undermining the ringgit.

Slowing Chinese growth and falling oil prices have deterred risk-taking this year, with the European Central Bank and the Bank of Japan indicating they may add to monetary stimulus due to the market turmoil. The ringgit is stabilizing after the worst drop since the Asian financial crisis last year, with all eyes on Prime Minister Najib Razak’s budget revisions next week as the oil-exporting nation gets hit by sliding commodities.

“Higher oil prices and general risk-on after the ECB president sweet talked the markets with convincing rhetoric on additional stimulus boosted sentiment,” said Vishnu Varathan, a Singapore-based economist at Mizuho Bank Ltd. “Bank Negara’s liquidity infusion is ringgit-positive as it could allay concerns about an excessive selloff in domestic and global markets.”

The ringgit appreciated 1.5 percent to 4.3175 a dollar as of 1:49 p.m. in Kuala Lumpur, the biggest gain since Oct. 23, data compiled by Bloomberg show. That trimmed the currency’s decline in 2016 to 0.6 percent after it fell 19 percent last year. The FTSE Bursa Malaysia KLCI Index of shares climbed 1 percent, the most this year.

Bonds Rally

The 10-year sovereign bond yield fell 13 basis points on Friday to 3.90 percent, Bursa Malaysia prices show. One-year interest-rate swaps declined nine basis points to 3.66 percent, above the central bank’s key policy rate of 3.25 percent, which has stayed unchanged since July 2014. Five-year credit-default swaps fell 14 basis points on Thursday to 210.72, CMA prices show.

Brent crude has rebounded almost 7 percent in two days from its lowest level since 2003, improving the outlook for Asia’s only major oil exporter.

Foreign investors sold a net $7 billion of Malaysian equities and bonds in 2015, and were net sellers of shares in the first two weeks of this year, according to central bank figures. Bank Negara said Thursday it had pumped 40 billion ringgit ($9.3 billion) into the banking system via monetary operations including the reverse-repurchase facility since early 2015 as “net external outflows reduced the amount of liquidity in the system.”

The statutory reserve requirement cut will add 6.2 billion ringgit to the system, according to estimates from Credit Suisse Group AG. There’s a risk that if the market interest rate structure is too low, it could result in further capital outflows, which could be negative for the ringgit, Singapore-based analyst Michael Wan wrote in a report released Friday.

“The cut in the statutory reserve requirement played a part in the falling swaps, which basically reflects the shift in sentiment toward a bias for some easing,” Mizuho’s Varathan said.