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imageSINGAPORE: Malaysia's central bank intervened for a third successive trading day on Tuesday to support the ringgit currency, traders said, as corruption allegations swirled round Prime Minister Najib Razak, raising doubts over his grip on power.

Thanks to Bank Negara's damage limitation, the ringgit has lost only 0.8 percent since the political storm broke on Friday, but it has weakened past an old currency peg of 3.80 per dollar, fixed in September 1998 during the Asian financial crisis and scrapped in 2005.

The ringgit closed at 3.8060 on Tuesday, helped off a low of 3.8100 by the heaviest day for intervention so far as foreign investors sold Malaysian assets.

A scandal over the $11.6 billion of debt wracked up by state fund 1MDB had been bubbling for months, with Malaysia's longest serving leader, former prime minister Mahathir Mohamed, making repeated calls for Najib to step down while asking where the money had gone.

But a Wall Street Journal report on Friday sent shockwaves through Malaysia and financial markets by alleging nearly $700 million was transferred into bank accounts believed to belong to Najib. Reuters is unable to verify the report. Najib has denied taking any money from the debt-laden state fund or any other entity for personal gain.

"The political drama is unlikely to be fixed overnight. It will continue and put the ringgit under pressure," said Lee Jin-yang, a macro analyst at Aberdeen Asset Management in Singapore.

"The ringgit is likely to face additional headwinds from broader US dollar strength and weak oil price as well," Lee said. He, like many other traders, did not see any quick reversal of fortunes for the ringgit. The 3.8000 level remains a strong psychological reference point for Malaysians, even though the central bank brought the currency off the peg 10 years ago.

Technical analysts have a more dispassionate perspective, and they see the ringgit gathering chart support between 3.8000 and 3.8200 - marking the 38.2 percent Fibonacci retracement of its depreciation from 1978 to 1998. If the support level is breached, the ringgit may weaken to 3.9060, the 50 percent retracement of its appreciation from 1998 to 2011, they said. Political risk had remained a background factor until recently, but the ringgit was already weighed down by worries about the impact of weak global prices on its oil and gas earnings.

It is Asia's weakest performing currency this year, having fallen 8.1 percent against the dollar.

Yet last week, Fitch Ratings somewhat unexpectedly opted to switch its outlook on the rating to "stable" from "negative".

Fitch had been the most pessimistic of the three major international credit ratings agencies on Malaysia, and there had been fears of a possible downgrade.

Instead, Fitch said its improved outlook "reflects the strong economic fundamentals and the sound financial position of the country".

Moody's Investors Service, said on Monday that 1MDB did not pose a systemic risk to Malaysia's economy, banks, or government finances. The government's fiscal deficit is improving. Inflation is benign, and economic growth, despite slower exports, was a respectable 5.6 percent in the first quarter.

Moreover, the worries about the weak crude price have been overdone, as Malaysia sells very little oil, but is the world's second largest exporter of gas, and gas prices have come down less steeply.

But the country and its currency could suffer from investors' growing aversion to risk as the Greek debt crisis rumbles on and China's stock market tumbles.

Foreigners are major investors in Malaysian government ringgit bonds.

They sold a net 14 billion ringgit ($3.7 billion) worth of the government bonds in the first six months of the year, according to central bank data showed.

If that escalates, the central bank may have to intervene more intensively in the currency market, traders said.

Copyright Reuters, 2015

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