RATES PLUS: Currency 44% Undervalued Shunned by Credit Suisse

RATES PLUS: Currency 44% Undervalued Shunned by Credit Suisse

By Mark Cranfield

     July 5 (Bloomberg) -- Investors should sell the ringgit as Malaysia’s “collapsing” trade balance will lead to currency depreciation, according to Credit Suisse.

·         Trade surplus in Southeast Asia’s third-biggest economy was 2.45b ringgit for May, beating median estimate of 1.23b ringgit in Bloomberg survey; making it about half of 4.6b ringgit recorded a year earlier

·         Currency is now trading 44% below fair value, second biggest undervaluation among Asia’s most-traded currencies, based on Economist’s Big Mac Index; Hong Kong’s dollar, which is pegged to the U.S. currency, is 50% undervalued

·         Prime Minister Najib Razak’s governing Barisan Nasional coalition said last month it plans to dispute the results of 21 seats lost in nation’s election, countering similar court challenges by Anwar Ibrahim’s opposition

·         “Malaysian politics remains messy, the trade balance is collapsing, and foreigners are overweight local currency fixed-income product,” Ray Farris, Singapore-based chief Asia strategist at Credit Suisse, says in an interview. “The big surprise and the key negative for the MYR” is the narrowing trade balance, he says.

·         About 31% of ringgit-denominated debt is held by global funds, according to an ADB report released last month

·         Ringgit will drop 2.0% from current levels to 3.2500 per dollar in three months, according to Credit Suisse; that compares with median forecast for appreciation to 3.1200 by strategists in Bloomberg survey

·         Currency will fall 2.0% to 2.5490 versus Singapore dollar in three months: Farris