The Malaysian and Indonesian currencies have been among the world's worst performing this year, but some analysts see signs that they'll stop moving together.
The two currencies recently fell to their weakest levels since 1998, during the Asian Financial Crisis, before recovering some of those losses. Concerns that the U.S. Federal Reserve would raise interest rates for the first time in nine years spurred a massive outflow of funds from emerging markets, including Asia's. But the Fed meeting on September 16-17 surprised markets by leaving rates unchanged and many analysts moved their forecasts for the next hike back into next year.
That helped the two hard-hit currencies to recover.
Malaysia's ringgit lost as much as 28 percent of its value against the U.S. dollar from the beginning of the year through the end of September before recovering around 7 percent so far this month. Indonesia's rupiah followed a similar path, shedding nearly 19 percent in the January-to-September period before recovering around 8.5 percent month-to-date.
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But it's not clear the two will continue to recover together.
"The rupiah is unlikely to regain its losses from earlier in the year," said Faraz Syed, associate economist at Moody's Analytics, in an email Wednesday. "The rupiah is on a downward trend. U.S monetary policy will eventually normalize. And we expect capital outflows to increase as Indonesia's foreign exchange reserves are low, making it the most vulnerable in Asia."
Fund managers also don't appear convinced Indonesian assets have crossed a rubicon. Bank of America Merrill Lynch's October survey of fund managers found that more than a net 10 percent are underweight on Indonesia, a reversal from a net of more than 5 percent having overweight positions on Indonesia in September.
Malaysia, however, fares slightly better. In October, a bit more than 10 percent of fund managers were underweight Malaysia, but that was down from a net of around 25 percent underweight in September.
Some think Malaysia's currency may find support.
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"The collapse in global oil prices, high short-term external debt, and a rise in political risk have all weighed on sentiment toward Malaysia over the last year," Krystal Tan, an economist at Capital Economics, said in a note Tuesday. "But while Malaysia's economy is set to slow, there are several reasons to think it will avoid a hard landing."
She noted that the share of Malaysia's economy driven by commodities, including crude oil and palm oil, has fallen over the past decade and a current account surplus should help cushion any capital outflows. The central bank has also indicated that much of the country's foreign currency debt exposure is hedged, she said.
Tan expects that Malaysia's economic growth will average around 4.5 percent for the next few years, only slightly slower than the 5.0 percent average over the previous 10 years.
But Indonesia's economic growth may face stronger headwinds.
For one, the rupiah's weakness has been stoking domestic inflation, DBS said in a note, noting that the country's average import content for production was estimated at around 70 percent.
That means the country's central bank, Bank Indonesia, can't cut interest rates to boost the economy and may even need to raise rates, further slowing growth, DBS said. Bank Indonesia is expected to keep interest rates on hold at its meeting later Thursday; in the second quarter, Indonesia's economy grew around 4.7 percent on-year.
In the short term, some don't expect the rupiah will advance much further.
"Thin liquidity, in addition to the heavy short positioning in rupiah, exaggerated the price action [in the recent rally], as stops were triggered and shorts squeezed out," Morgan Stanley said in a note Tuesday. "The rupiah rally also provides opportunities for onshore corporates to catch up on their hedging targets, while Bank Indonesia may also use this opportunity to rebuild lost reserves," both of which will spur outflows from the currency, it added.
Morgan Stanley still expects the U.S. dollar to fetch 14,400 rupiah at year-end, compared with 13,614 in early Thursday trade in Asia.