DONALD Trump’s victory appears to have crashed the ringgit.

Bankers woke up to a rude shock last Friday to find out that the ringgit’s non-deliverable forwards (NDF) trading at almost 4.40 against the US dollar. Overnight, the ringgit appeared to have depreciated by almost 3% — a considerably sharp fall in the foreign exchange market.

It wasn’t just the ringgit. With the exception of the Japanese yen, most Asian currencies ended the day weaker against the US dollar.

But an uncharacteristic response by Bank Negara Malaysia would exacerbate the ringgit’s sell-off, sending the local currency market into a tailspin. By 10.30am, NDF rates would skyrocket to a record high of 4.587 against the US dollar as investors scrambled to hedge against the rapid depreciation.

By the end of the week, the ringgit was among the worst performing currencies in the region, down 3.4% week on week to 4.342 against the greenback.

In fact, sentiment surrounding the ringgit was so poor that the market overlooked a surprisingly positive set of GDP numbers that were announced last Friday. The Malaysian economy expanded 4.3% in the third quarter, smashing consensus expectations of 4.1% growth or less.

Hence, it begs the question: was the ringgit’s selldown too hasty?

“The real catalyst for the selldown of emerging market currencies was the sharp uptick in US bond yields on Nov 10,” says Tan Eng Kiang, Alliance Bank’s head of financial markets.

“Trump’s policies are expected to be somewhat different. He advocates tax cuts to spur consumption, but this gives the government less revenue to pursue its fiscal spending. Hence, the market anticipates a bigger budget deficit may follow and this will steepen US Treasuries. As the supply of new Treasuries grows, yield is expected to go higher,” he explains.

Since the end of the US presidential election on Nov 8, 10-year US Treasury yields have shot up 29.53 bps to 2.15% as at Nov 10 (in US trading).

“Given that US treasuries are among the most liquid assets you can hold, if their yields rise, riskier emerging market sovereign bond yields will also have to rise in tandem to prevent capital outflow in order to maintain a decent spread premium between the two,” Tan explains.

Since the elections, 10-year Malaysian Government Securities (MGS) yields have risen 28.6bps to 3.94%. Rising MGS yields also tends to be correlated with a weaker ringgit.

This is because yields typically rise when there is selling pressure on MGS. If foreign bondholders make up the bulk of the sellers, and they choose to take their money out of the country, it will weaken the ringgit. Foreign holding of MGS is currently about 50%.

It is interesting to note that MGS yields have been on the rise post-US election, in tandem with US Treasury yields. However, the depreciation of the ringgit in the same period was relatively minor, at only 0.8%.

“After having seen strong foreign participation in the local bond market over the year, we noted foreign selling interest this time around. We think that these movements are dictated by the unwinding of the carry trade, of which there is heavy and profitable positioning through the year,” Affin-Hwang Capital says in a report following the depreciation of the ringgit.

“Though still unquantifiable at the time of writing, the outflows from the bond market have exacerbated the weakness in the ringgit as investors reduced their positions in both the bond market and our local currency.”

The report stresses that the selloff is not a local phenomenon, and that emerging market currencies would continue to play hostage to US dollar strength.

Affin-Hwang Capital also notes that the exodus of foreign bondholders isn’t the only reason for the weaker ringgit.

“Compounding the negative impact to the ringgit from these outflows are a weaker crude oil price and also a six-year low for the Chinese yuan, which our currency is correlated with,” notes the report.

That said, MGS yields could be a reaction to an overreaction. Tan asserts that the uptick in US Treasury yields is not justified. In fact, he expects it to come back down at some point.

“Trump isn’t even in office yet, let alone flooding the market with new Treasury issuances to drive up bond yields,” he points out.

Trump will only be sworn into office on Jan 20, almost two months from now.

Hence, the rise in US Treasury bond yields has been fuelled by selling activity alone, just like emerging market bond yields.

“If you are selling US Treasuries and they are selling Asian bonds, then where is the money going? The money has to find a home somewhere,” says Tan.

Unless the money flows into other asset classes like equities or commodities, it will have to flow back into US Treasuries or Asian bonds at some point.

“Give it a week, maybe two, for sanity to return to the market. People will realise that at 4.30 (against the dollar) the ringgit may look reasonably attractive to re-enter the market, especially with MGS (10-year) yields hovering at 4% now,” Tan says.

In fact, based on real effective exchange rate calculations, the ringgit is estimated to be fairly valued at 4.10 against the US dollar, says Peck Boon Soon, head of Asean Economics at RHB Research Institute.

The ringgit should not be facing liquidity trouble that could have caused the volatile trading on Friday, he adds.

“Malaysia still has a current account surplus. This means we don’t just have outflows when people take their money out; we also have inflows from trade. So, liquidity should be manageable. Based on the trade numbers thus far, it shouldn’t be a problem staying in [a current account] surplus,” says Peck.

Looking ahead however, Peck says rising US Treasury yields and the corresponding increase in MGS yields could be problematic for Malaysia. High MGS yields would raise the cost of fundraising for the government. At the same time, the weak ringgit could limit the amount of monetary stimulus that Bank Negara can undertake.

That said, many economists anticipate Bank Negara to cut interest rate by up to 50 bps in 2017 — at least a 25bps cut in the next six months, and the possibility of another cut towards the end of the year.

Against this backdrop, the US Federal Reserve has indicated that it plans to raise interest rates by year-end. This could put more pressure on the ringgit, since interest rate hikes will strengthen the US dollar.

In the short term at least, there is a strong case for the ringgit to rebound. On the ground at least, the situation improved quickly. While the official exchange rate struggled to find its footing amid the volatility, money changers saw rates fall throughout Friday.

Most began selling the US dollar at RM4.50 in the morning, in line with the NDF rates. But by lunch time, most had already begun to trim rates substantially, some as low as 4.38 against the US dollar.

“It’s business as usual so far. There hasn’t been a rush to buy US dollars like we’ve seen in the past. Only really desperate people will buy at these sort of prices,” says a local money changer who runs one of the largest chains in the country.

He also dismisses concerns that there was a shortage of physical foreign currency.

“We have no trouble getting stock. We simply had to increase the rates to reflect the risk when we saw the US dollar shoot up,” he says.

That said, the ringgit isn’t out of the woods yet. Sentiment is still fragile and there are still many risks for the currency to negotiate. All it would take is a bout of slower-than-expected growth, weaker crude oil prices or a current account deficit from weaker trade.

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