PETALING JAYA - The ringgit led the decline in emerging Asian currencies, as regional stocks retreated and investors sold out of high-yielding assets amid a global bond rout.
Extending its weak performance since last Friday, the ringgit fell 0.36 per cent to close at 4.1285 against the US dollar.
"The weakness of the ringgit is due to a combination of factors. Firstly, we are now in a risk-off market environment; secondly, the crude oil market outlook remains bearish, with low crude prices expected to last longer, and thirdly, there are concerns that the sluggish economic data coming out of the country could point to a slower-than-expected growth for Malaysia," said a bond dealer with a local bank.
"The fact that there is a high foreign ownership of local bonds also makes the ringgit more vulnerable to capital outflow, which is happening now," he added.
Foreign holdings of Malaysian Government Securities (MGS) and government investment issues, were at record highs of 51.9 per cent and 10.6 per cent, respectively, in July.
According to analysts, previous trends have indicated that the ringgit, along with the Indonesian rupiah, tend to be the most vulnerable currencies in the region amid a risk-off market environment. However, the medium-term outlook for the ringgit is mixed, with some saying the current weakness is only a temporary phenomenon.
"As far as we can see, the ringgit remains strongly supported by Malaysia's sound fundamentals. The short-term volatility is due to the upcoming Federal Open Market Committee (FOMC) meeting amid uncertainty whether the US Federal Reserve (Fed) will hike interest rates," said Maybank Kim Eng group chief executive officer John Chong.
Chong added that his group expected the ringgit to trade near RM4 (S$1.32) against the greenback by year-end.
Uncertainties about the directions of monetary policies in developed economies, in particular the United States and Japan, had led to the recent sell-off in global financial markets.
The Bank of Japan (BoJ) and the FOMC would hold their respective monetary policy meetings from Sept 20-21.
The BoJ was reportedly considering cutting short-term interest rates deeper into the negative territory, while the US Fed is expected to weigh the case for an interest rate hike.
The market believed a US rate hike is more likely to happen towards the end of the year.
"The bond market outlook seems to have turned less sanguine. If the Fed surprises with a hike in September's FOMC meeting, which is currently viewed by the market as unlikely at only a 22 per cent probability, both the US Treasury yields and ringgit-to-US dollar exchange rate may be repriced higher, which in turn could weigh on the MGS," Maybank Investment Bank Research's fixed-income team said in a report.
According to CIMB Fixed Income Research, demand was relatively weak in recent government bond auctions, while trading in the second market was cautious.
"The trading of government bonds was under pressure due to the weaker ringgit and the crude oil price, as well as tracking higher US Treasury yields ahead of the upcoming FOMC meeting," the brokerage said.
"Also, we noted players trimming positions amid the holiday-shortened week, as well as the unwinding of positions after Bank Negara held the overnight policy rate at 3 per cent at its recent monetary policy committee meeting," it added.
Meanwhile, the International Energy Agency said on Tuesday that the surplus in global oil markets would likely last for longer than previously thought, persisting into late 2017, as demand growth remained slow and production continued to grow.
The persistent global oil glut would continue to weigh on the prices of the commodity, which is a major revenue contributor to the Government. Oil-related sources are expected to account for about 21 per cent of the Government's revenue this year.
Crude oil prices on the international benchmark Brent recovered 0.38 per cent yesterday to US$47.28 per barrel after falling by around 2.5 per cent a day earlier.
Stocks on Bursa Malaysia were also weighed down by profit-taking in index-linked counters.
The benchmark FBM KLCI extended its losses for the third trading day, after falling 15.79 points yesterday to close at 1,661.39. This represented a decline of 1.84 per cent year-to-date.