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Asia FX Soars On China Reserves Relief As Ringgit Reversal Catches Traders Wrong-Footed

While it’s far too early to know whether this is a dead cat bounce or a meaningful reversal, Asia EM FX got some much needed relief overnight as both the ringgit and rupiah staged strong rallies despite the fact that the macro picture still looks largely grim in the near- and medium-term. 

Trade data came in favorable for Malaysia as the country recorded its largest surplus in nine months, sending the ringgit surging. Here’s Barclays with the rundown:

Malaysia’s trade surplus widened significantly to MYR10.2bn in August, improving from a MYR2.37bn surplus in July due to much stronger exports as well as weaker-than-expected imports. Exports continue to do well, rising 4.1% y/y in August (Jul: 3.4%), largely on strong increases in metal products (41.7% y/y), electronics (16.7% y/y) and machinery & appliances (12.3% y/y). Imports however fell sharply, contracting 6.1% y/y (Jul: +5.9%), with petrochemicals and crude imports behind the decline. This is a reversal of the jump in these items in July, which typically tends to be one-off, before reverting back to normal.


Export momentum remains resilient, but likely to soften going forward, in our view. With the higher currency volatility in Asia and weakening demand in China, we expect Malaysia's export performance to remain modest over the rest of 2015. In terms of markets, exports to China remain strong (32.4% y/y), as well as to the US (24.2% y/y).


Despite the much wider trade surplus, we continue to expect the current account to deteriorate at the margin in 2015. Malaysia has recorded a trade surplus of MYR54.2bn in the first eight months of the year, up slightly from MYR52.2bn in the year-earlier period. We expect the current account position to remain comfortable, as capital imports are likely to slow down in coming months due to the weaker MYR. Despite recent capital outflows, we believe Malaysia’s external debt position also remains serviceable. We forecast 2015 GDP growth of 5.0%, versus 6.0% in 2014.


The rally in the ringgit looks to have caught quite a few folks wrong-footed, fueling a sharp, across-the-board reversal. As Bloomberg noted overnight, "USD/IDR and USD/MYR spot and forwards [were] seeing broad-based stop-loss selling," although liquidity was thin. Here's more:

The ringgit strengthened the most since 1998 as Malaysia reported its biggest trade surplus in nine months and crude oil prices climbed, while resurgent global demand for Indonesian assets helped drive the rupiah’s biggest gain in six years.


The ringgit jumped 3.5 percent to 4.2253 a dollar as of the close in Kuala Lumpur, trimming its loss for the year to 17 percent, prices from local banks compiled by Bloomberg show. The rupiah surged 3.1 percent to 13,828. Thailand’s baht was Asia’s next best performer with a 1.3 percent advance. “Positions are being reversed drastically,” said Leong Sook Mei, Southeast Asia head of global markets research at Bank of Tokyo-Mitsubishi UFJ in Singapore.


Emerging-market assets are rallying this week after disappointing U.S. jobs data on Friday prompted futures traders to almost rule out a Federal Reserve interest-rate increase in 2015. Foreign funds added $82 million to their holdings of Indonesian shares in the last two days, which if sustained would lead to the first weekly inflows since July, exchange data show. Overseas investors increased ownership of Malaysian debt in September for the first time in three months, according to central bank figures Wednesday.



"We’d always expected a turnaround for emerging currencies sooner or later, but never of this speed or scale," said Trian Fatria, treasury research analyst at state-owned PT Bank Negara Indonesia in Jakarta. "We keep revising our estimates and charts, but the rupiah has breached all its technical levels."


“Definitely the market is taking its cue from the ringgit,” said Danny Wong Teck Meng, chief executive officer at Kuala Lumpur-based Areca Capital Sdn., which manages about $224 million in assets. “The better-than-expected trade data is an extra catalyst for the market.”

Of course at a more basic level, all of this is being fueled by last week's horrendous NFP report in the US which served to alleviate fears that an imminent Fed hike would accelerate EM capital outflows and importantly, the market seems to believe that the outflows from China are slowing. Here's Goldman: "PBOC’s FX reserves decreased by US$43bn from US$3.557tn at end-August to US$3.514tn at end-September (vs. $94bn FX reserve fall in August), suggesting a slowdown in FX outflow."

One should take all of this with a grain of salt. First, the data on China capital outflows is impossibly convoluted, as Goldman admits when they note that "there could also be possible short-term transactions and agreements between the PBOC and banks (e.g., forward transactions, FX entrusted loan drawdown or repayment) that may complicate the interpretation of the change in FX reserves." In other words, like Copom, the PBoC has other methods of combatting the pressure on its currency that might not be immediately reflected in the level of reserves and so one should be careful when making assumptions about capital flows. Indeed, SocGen estimated that the PBoC's offshore forwards meddling had already helped to run the intervention bill up to $47 billion by mid month. Second, the country-specific dynamics here still aren't favorable. For instance, the other headline that came down this morning regarding Malaysia was this: "Malaysia’s foreign reserves fall to $93.3b as of Sept. 30." 

So the country's crisis cushion is still being depleted and one month's worth of upbeat trade data doesn't exactly fix that, plus, there's something rather dubious about effectively rooting for decelerating global trade via slumping imports just so the EM current account doesn't completely implode. Consider this data point for instance, also out overnight: "Taiwan September exports fall 14.6% y/y vs est. -11.2%; imports slide 24.4%, most since Aug. 2009, vs est. 13.5% decline." And here is SocGen's take on those rather scary-looking numbers: "...the only reason not to be totally pessimistic is that the lack of improvement might be due to the typhoons."

Finally, here's a bit more color on the ringgit's big day, again via Bloomberg:

  • Ringgit surges 4.6%, headed for biggest advance since 1998, to 4.1833 per dollar, according to onshore prices; trade surplus widened to 10.2b ringgit ($2.4b) for Aug., compared with median forecast of 4.10b ringgit in Bloomberg survey.
  • Exports up 4.1% versus survey forecast of 1.3% increase; imports declined 6.1%, most in three months
  • USD/MYR spot and forwards seeing broad-based stop-loss selling, Asia-based FX traders say; gains magnified in thin liquidity
  • Pivot point at 4.3744; USD/MYR breaks support at 4.3515, 4.3286 and 4.2828; resistance at 4.3973, 4.4202, 4.4660
  • USD/MYR’s slow stochastics %K below %D and falling
  • 1-mo. implied volatility rises 42 bps to 16.5400%; past yr’s avg 10.4906%
  • Ringgit 1-mo. forwards rise 4.0% to 4.1860 per dollar

We'll close with the following rather self evident bit from Mitul Kotecha, head of foreign-exchange and rates strategy for Asia at Barclays in Singapore:

“We are still in a very cautious environment for emerging-market currencies and unless there is a sharp turnaround in commodity prices or capital flows, I still think there’s going to be pressure on the ringgit and the rupiah."