When China went the “nuclear” (to quote SocGen) devaluation route earlier this week in a last ditch effort to rescue its export-driven economy from the perils of an increasingly painful dollar peg, everyone knew things were about to get a whole lot worse for an EM currency basket that was already reeling from plunging commodity prices, slumping Chinese demand, and the threat of an imminent Fed hike.
Sure enough, EM currencies from Brazil to South Korea plunged, and monetary authorities - unsure whether to play down the move or cry foul - scrambled to respond.
With some Asian currencies already falling to levels last seen 17 years ago, some analysts fear that an Asian Currency Crisis 2.0 may be just around the corner.
That rather dire prediction may have been validated on Friday when Malaysia’s ringgit registered its largest one-day loss in almost two decades.
As FT notes [12], “sentiment towards Malaysia has been damped by a range of factors including sharp falls in global energy prices since the end of June. Malaysia is a major exporter of both oil and natural gas, with crude accounting for almost a third of government revenue.” The central bank meanwhile, "has opted to step back from intervening in the market in response to the falling renminbi, unleashing pent-up downward pressure on the ringgit.” That, apparently, marks a notable change in policy. “The most immediate challenge is the limited scope of Malaysia’s central bank to step in,” WSJ says [13], adding that “for weeks, it tried to stem the currency’s slide, digging into its foreign-exchange reserves to prop up the ringgit and warning banks from aggressively trading against its currency."
Surveying the damage, here's the one-day:
And the one week:
And the one month:
To be sure, capital has been flowing the wrong way in Malaysia for quite some time. As Bloomberg reminds us [14], "foreign funds have dumped about $3 billion of the nation’s shares this year as Prime Minister Najib Razak grapples with allegations of financial irregularities at a state investment company."
Indeed, concerns around capital outflows may have come to a head in today's move. Here's a look at where things stood in July (it's gotten worse since, as FX reserves fell below $100 billion by the end of last month):
[15]
And among Asian currencies, the ringgit is especially sensitive changes in "sentiment":
[16]
Clearly, falling FX reserves limit the BNM's ability (not to mention willingness) to arrest the slide.
As for specific catalysts for Friday's move, it looks like a $10 billion bond maturity may have contributed - i.e. investors converted the proceeds from ringgit back into dollars.
"It’s a bit of vicious cycle", Saktiandi Supaat, Singapore-based head of FX research at Maybank, told Bloomberg over the phone. He also remarked that it doesn’t seem fundamentally driven but rather sentiment-based or even a speculative move.
And it wasn't just the ringgit, Malaysian equities and bonds plunged as well, with stocks turning in their worst two week performance since Lehman.
[17]
[18]
[19]
So while China may have succeeded in jawboning/intervening the yuan back to some semblance of (temporary) stability, the global reverberations look to have just begun.
