The ascent of SGD (Singapore dollar)/MYR (ringgit) to record highs has been powered by the rare inversion of short-term rates in Singapore and Malaysia.
That could be blunted in two weeks if Bank Negara Malaysia (BNM) joins regional peers with a jumbo rate hike.
In the meantime, the SGD has a small positive carry over the MYR, which is a relatively free lunch for forex traders after years of low SGD rates.
A complication for Malaysia’s central bank is the forthcoming general election, which is likely to be held in November.
But the ringgit is at risk of becoming a one-way bet if a circuit breaker isn’t introduced.
Singapore dollar yields have been tracking those in the G-10 space higher, while MYR rates have risen more slowly as BNM hiked interest rates this year by 75 basis points (bps), compared to 300 bps by the US Federal Reserve.
SGD/MYR has risen about 8% this year, but that trend is vulnerable to a reversal if the Malaysian central bank acts aggressively next month.