Malaysia, Indonesia markets roiled as investors scramble for hedge on Trump

Emerging markets in Southeast Asia were slammed on Friday as Donald Trump’s shock victory in the U.S. presidential election reverberated around the world, with Malaysian and Indonesian central banks acting to try to defend their currencies as investors sold stocks and bonds. Reuters

The latest selloff was triggered by investors revising their expectations, with a growing consensus that Trump’s economic policies will be inflationary and push U.S. rates up faster than previously thought, driving funds out of emerging markets and into dollar-based assets.

Yields on benchmark 10-year Treasuries have spiked 41 basis points in the past two days as investors scrambled to readjust positions. Emerging markets in Asia are particularly vulnerable to hot money outflows, and investors have been unsettled by the deep uncertainty over how broad U.S. and international policy will ultimately play out under Trump.

During Asian trading, the Malaysian ringgit sank to more than 12-year lows in the offshore market. The ringgit’s one-month non-deliverable forwards (NDFs) MYR1MNDFOR= lost as much as 3.7 percent in the offshore market from the previous close to 4.5395 per dollar, its weakest since at least September 2004, according to Thomson Reuters data. By contrast, the ringgit spot MYR=MY barely moved at 4.27 per dollar with liquidity extremely thin. As a result, the dollar/ringgit’s NDFs premium over the dollar/ringgit spot increased to 0.2695, the widest since at least April 2008, according to Thomson Reuters data.

Bank Negara Malaysia, however, made sure the spot rate remained relatively stable in the onshore market, traders said. Malaysia’s central bank governor Muhammad Ibrahim told a news conference, called to release upbeat economic growth and current account data, that the ringgit should not be priced out of sync with fundamentals. And, he said, the central bank had a responsibility to tell banks to take temporary measures to calm the market. “We don’t want to be dictated by factors that have nothing to do with the country’s fundamentals,” Ibrahim said.

Later, the central bank issued a statement in which it added that it was providing necessary liquidity in the currency market. Traders in Kuala Lumpur said the central bank had told them not to quote offshore rates and was approving large ringgit sell orders on a case-by-case basis. The tactic seemed to work with onshore trade reportedly very thin.