Ringgit declines as China seen allowing weak yuan with new index

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 as it shifts away from linking it to the dollar.

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 U.S. borrowing costs. The China Foreign Exchange Trade System, run by the central bank, published the index on Friday that includes the yuan and 13 other currencies. The dollar has a 26.4 percent 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 0.7 percent to 4.3230 a dollar as of 10:21am in Kuala Lumpur, taking its loss this month to 1.4 percent, 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 percent weighting and the yen 14.7 percent. China’s currency dropped 0.2 percent in offshore trading in Hong Kong.

Bonds, swaps

Brent slumped 4.5 percent on Friday to $37.93 a barrel, the lowest level since 2008 and below Malaysia’s 2016 budget assumption of $48. Malaysia derives about 22 percent 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 30 billion ringgit ($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 percent of gross domestic product."

Sovereign bonds retreated, with the yield on the 2020 notes rising two basis points to 3.84 percent, according to prices from Bursa Malaysia. The cost to insure the nation’s debt from default for five years climbed 33 basis points last week to 209, the biggest increase since late September and the highest in seven weeks, CMA prices show.