Ringgit, rupiah shed ‘vulnerable’ tag to lead regional gains

Indonesia’s economy beat analysts’ estimates to expand 5.04% in the fourth quarter and the rupiah together with the baht and ringgit are the top three performers among Asia’s emerging markets over three months. – Reuters file pic, February 12, 2016.Typically regarded as the more vulnerable currencies in Asia to external shocks, the ringgit, baht, and rupiah are proving the most resilient on their relatively lower exposure to China and a dovish Federal Reserve.

The Malaysian, Thai and Indonesian exchange rates are the top three performers among Asia’s emerging markets over three months.

That’s a reversal of fortune from 2013’s taper tantrum when they trailed their northern counterparts as the United States central bank indicated it would wind down unprecedented stimulus.

“The market has moved away from being wary of Fed tightening to pricing in a Fed relent and that’s benefiting countries with higher-yielding assets like Indonesia for now,” said Mallika Sachdeva, a foreign-exchange strategist at Deutsche Bank AG in Singapore.

“North Asian currencies are being treated as proxies for China currency stress.”

The German lender favours the rupiah and the ringgit over the South Korean won and Taiwan dollar, she said.

Slowing inflation and faster growth in Indonesia are wooing foreign funds to the country, while Malaysia’s government managed to keep its budget deficit within target and exports have held up even as oil prices slumped.

A lot of negatives had already been priced into these exchange rates because of the plunge in commodity prices in 2015, said Nizam Idris, head of strategy for fixed income and currencies at Macquarie Bank Ltd in Singapore.

Commodity prices

“If the dollar strengthens again and that is our base case going forward, then Southeast Asian currencies can also weaken but with a lower beta than North Asian currencies,” he said.

The recent stabilisation in commodity prices has helped the ringgit and rupiah, but not enough to go long on them against the greenback, Nizam said, adding that he was most bullish on the rupiah.

The ringgit rose 5.3% over three months, while the baht and the rupiah climbed 1.8% and 1%, respectively. All other Asian emerging-market currencies have dropped, led by a 4% decline in the won.

The resilience of Southeast Asian exchange rates is buoying demand for the nations’ local-currency sovereign debt, and Fed Chair Janet Yellen’s remarks to Congress that US interest rate increases may be delayed drove them higher yesterday.

Indonesian notes have returned 5.7% over the last three months, the most in Asia, followed by a 4.3% gain in Thai securities, Bloomberg indexes show.

Thailand’s gross domestic product probably increased 2.7% last year as the government boosted infrastructure spending, compared with a revised 0.9% in 2014, according to the median estimate of economists in a Bloomberg survey before data due February 15.

The baht was less vulnerable than the rupiah or ringgit as foreign funds held a smaller proportion of Thai sovereign notes, Nizam said.

China ties

Indonesia’s economy beat analysts’ estimates to expand 5.04% in the fourth quarter and inflation has stayed below 5% over the last three months after exceeding 7% in the middle of 2015.

President Joko Widodo said he was confident growth would reach 7% by 2019 in an interview with Bloomberg Television yesterday. Malaysian exports have risen for seven consecutive months through December.

Indonesia, along with Malaysia and Thailand, is counting on a combination of domestic demand and public spending to shore up their economies. Private consumption makes up 56% of Indonesia’s GDP and 51% of Malaysia’s, according to figures from Bank of America Merrill Lynch.

North Asia is more reliant on exports and closely tied to China. Around 40% of Taiwan’s overseas sales and 31% of South Korea’s go to the mainland, data compiled by Bloomberg show.

That compares with 18% for Malaysia, 15% for Thailand and 12% for Indonesia.

“In the near term, with external drivers weak across the globe, economies with domestic demand strength will likely continue to outperform,” said Irene Cheung, a foreign-exchange strategist in Singapore at Australia & New Zealand Banking Group Ltd, the most-accurate forecaster in Bloomberg rankings for Asian currencies.

“North Asian currencies are more exposed to the global trade recession.” – Bloomberg, February 12, 2016.