Buy Ringgit Options as Exports Dwindle, Barclays Says

By David Yong

Jan. 15 (Bloomberg) -- Malaysia’s ringgit will weaken as falling commodity prices erode the trade surplus and the central bank cuts interest rates to revive economic growth, according to Barclays Capital Plc.

To profit from the decline, the U.K. investment bank recommended a one-month ringgit put option against the dollar with a so-called reverse knock-out price, according to a research report issued yesterday. This type of derivative is a cheaper alternative to a regular option because the knock-out barrier limits the maximum return.

“The drivers of Malaysia’s balance of payments dynamics are turning against the ringgit,” Goh Puay Yeong, a currency strategist at the bank, which is the third-biggest trader of foreign exchange, wrote in the report. “With oil prices falling, Malaysia’s export buffer from energy-related commodities is also rapidly thinning.”

Investors should buy the options with a strike price of 3.60 per dollar and a knock-out trigger of 3.66, Goh said in an interview in Singapore. The option ceases to exist should the currency weaken 1.8 percent to 3.66 or beyond from the spot rate of 3.5940 as of 3:37 p.m. in Kuala Lumpur.

The investor can exercise the option by buying the dollar at the strike price of 3.60, and selling the U.S. currency at the same time in the spot market at just below 3.66, thus pocketing the difference, Goh said.

Slumping Exports

Malaysia’s currency dropped to 3.5958 today, the lowest since Dec. 11, according to data compiled by Bloomberg. It has declined almost 4 percent this month, the second-biggest loss in Asia after the South Korean won, as Malaysian exports contracted and factory output slumped by the most since 2004.

Malaysia’s trade surplus sagged to 10.6 billion ringgit ($2.95 billion) in October and November, versus an average of 13.9 billion ringgit during the third quarter, Barclays said. Foreign-exchange reserves fell to $91.4 billion on Dec. 31 from $97.7 billion on Nov. 28, the lowest level since April 2007, the central said last week.

Crude oil traded at $36.62 a barrel compared with a record high of $147.27 reached on July 11. An average price of $60 a barrel in 2009 will trim Malaysia’s current-account surplus by half to 7.9 percent of gross domestic product, Barclays forecasts.

Prices of palm oil, Malaysia’s biggest commodity export, have dropped 58 percent since touching an all-time high of 4,298 ringgit per ton in March last year.

Bank Negara Malaysia will lower its overnight interest rate to 2 percent from 3.25 percent by year-end, Barclays predicts, which would be the lowest level since the benchmark was introduced in 2004. The first cut will likely be a quarter- percentage point on Jan. 21 when policy makers kick off meetings fro 2009, it said.

To contact the reporter on this story: David Yong in Singapore at dyong@bloomberg.net