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Malaysia’s ringgit may keep tumbling amid the market's Trump tantrum

Malaysia's currency has been among the hardest hit in the market's "Trump tantrum" after the surprise U.S. election outcome, and the ringgit's pain likely won't end soon, analysts said.

Emerging market assets have tumbled in general in the wake of president-elect Donald Trump's upset win as the dollar surged and U.S. Treasury yields jumped. That hurts emerging-market companies' ability to service dollar-denominated debt and spurred outflows from the segment on the prospect of higher, less-risky returns on Treasurys.

Additionally, markets have been pricing in Trump's aggressive rhetoric on curtailing global trade with the U.S., which was likely to disproportionately hurt trade-dependent emerging economies.

But Malaysia's currency has been especially hard hit, with the dollar climbing as much as 5.8 percent against the ringgit so far in November. On Monday, the dollar was fetching as much as 4.4300 ringgit, the highest in more than a year and flirting with levels last seen during the Asian Financial Crisis in 1997.

That's spurred the central bank to intervene in the market to support the ringgit.

Analysts at Macquarie said that was an indicator of more pain to come. In addition to stepping directly into the foreign-exchange market, the central bank, Bank Negara Malaysia, has also warned banks to restrict trading in offshore non-deliverable forwards (NDFs) on the currency, which have fallen further than the spot rate.

"Bank Negara Malaysia's admission on Friday that it is currently intervening in the foreign-exchange market shows that the selling pressure on emerging market foreign exchange is even worse than the price action suggests," Macquarie said in a note on Monday.

Other analysts pointed to some Malaysia-specific factors.

"The ringgit move has been rather sharp and this is partly due to the fact that it's one of the more globalized financial markets, especially the bond market," Trinh Nguyen, senior economist at asset manager Natixis, told CNBC's "Squawk Box" on Monday.

She noted that a high percentage of Malaysia's domestic bond market is held by foreign investors, making it "very vulnerable" to an external shock.

"Whenever there's an external shock unrelated to Malaysia, and some of this is related to Malaysia as well, it can move the currency massively," she said. "This is because investors are reshuffling their portfolio and this reshuffling will continue for some time as we learn more about what the Trump policy would be like in the future."

Others have also pointed to concerns about Malaysia's bond market.

Krystal Tan, an Asia economist at Capital Economics, noted that the country needs to roll over a large stock of short-term external debt, equivalent to around 28 percent of its gross domestic product (GDP), making the ringgit vulnerable during periods of weak risk appetite.

Tan expected the central bank would continue to intervene on the currency.

Foreign currency denominated debt was equivalent to just under 40 percent of Malaysia's GDP, she noted.

"The further the currency falls, the more expensive this debt is to service," she said in a note dated Friday. While the central bank has made soothing comments about that debt largely being hedged, it didn't provide details, Tan noted, adding she was sceptical of the claim.

"That they have felt the need to intervene to support the ringgit suggests they are less sanguine in private than they are in public," she said.

Indeed, analysts were pointing to the central bank's efforts to target NDF trading as spurring fears of capital controls. When it comes to Malaysia, markets tend to be more sensitive to tea-leaf reading over capital controls because the country was the first to impose them in 1997, during the Asian Financial Crisis.

In a note Monday, DBS noted that the central bank's efforts to clamp down on NDF trading were aimed at tighter enforcement of existing regulations against offshore ringgit trading.

But it added, "it is expectation that drives the market. Fears of capital controls obviously has added more pressure on the currency."

Vincent Isore | IP3 | Getty Images

DBS also noted that one of the reasons the ringgit has fallen so much in the Trump tantrum was simply because it was one of the better performing currencies in the first five months of the year.

Part of the ringgit's pain can be laid at the greenback's door. The dollar index, which measures the greenback against a basket of currencies, jumped to as high as 101.48 last week, reaching the highest level in at least five years, according to Reuters data. That's up from levels below 97 in the days leading up to Trump's win.

But Natixis' Nguyen noted that some of the ringgit's pressure was related to political developments in the country.

Protests organized by the electoral reform group Bersih drew thousands to the streets of Kuala Lumpur on Saturday to demand the resignation of Prime Minister Najib Razak over his alleged involvement in a grand corruption case related to state-backed investment fund 1 Malaysia Development Berhad, or 1MDB. The rally drew as many as 40,000 protesters according to official estimates, but some claim the crowd was larger.

In the wake of the protest, at least 15 activists and members of the political opposition have since been arrested, including Bersih chairwoman Maria Chin Abdullah, who was taken in under a new security law meant for terrorists.

Nguyen said the political situation meant that the prime minister was more focused on damage control to help boost his re-election chances, rather than economic reforms.

That's a headwind for a country facing slow investment and credit growth, she said.

Some had extremely bearish forecasts for the ringgit.

James Chin, director of the Asia Institute at University of Tasmania, told CNBC's "Street Signs" on Monday that it wasn't out of the realm of possibility for the dollar to rise as high as 5 ringgit.

"Everything will be dependent on the confidence in the market. Right now there is little confidence that Najib can look after the economy," Chin said, noting that the ringgit was tumbling despite the prime minister returning from a trip to China with a passel of Chinese investments

"The ringgit can go down very fast and it all depends on the herd mentality in the markets," Chin said.

If the ringgit did hit 5 to the dollar, Chin expected that might spell the end of Najib's grip on power.

"A lot of the consumer items that you buy in Malaysia are actually imported. And for almost all the imports, the currency they use is the U.S. dollar," he said. "So when the U.S. dollar goes to five to one, that means almost everything in Malaysia will go up by 20 percent."

Chin expected that would shake Najib's ability to remain in office because it would dent the finances of the wealthy along with the rest of the population.

—Nyshka Chandran contributed to this article.

—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1

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