Malaysia's ringgit is poised to rebound from a three-year low as the economy's resilience damps concern rising US Treasury yields will prompt overseas investors to dump the nation's bonds, trading patterns show.

The currency has dropped two per cent since June 30 to 3.2255 per dollar, a loss second only to Indonesia's rupiah among 23 emerging-market currencies. The decline pushed the ringgit beyond the limits of the Bollinger band, signaling a reversal may be imminent, data compiled by Bloomberg show. That's the biggest deviation in developing markets. Stochastic oscillators also showed the ringgit is oversold.

Morgan Stanley predicts Malaysia's economic growth and current-account surplus, which is more than twice China's relative to gross domestic product, will help the ringgit catch up with regional peers. The central bank can use its US$138 billion of foreign-exchange reserves to support the currency, according to Bank of America Merrill Lynch. GDP is forecast to grow five per cent this year, after a 5.6 per cent gain in 2012, the median estimate in a Bloomberg survey of 21 analysts shows.

"We might be coming close to the end of the weakness cycle in the ringgit," Rahul Bajoria, a Singapore-based economist at Barclays Plc, said in a July 30 interview. "The current-account surplus still remains quite large, even though it has come off" and domestic demand is driving growth, helping shield the economy from external shocks, he said.

The ringgit's 5.2 per cent loss this year would be its worst annual performance since a 35 per cent plunge in 1997, during the Asian financial crisis. It reached 3.2379 per dollar yesterday in Kuala Lumpur, the weakest level since July 2010.

Fitch Ratings lowered its outlook for Malaysia's A- credit rating to negative from stable yesterday, citing worsening prospects for reducing government debt levels.

The currency slid this month on concern global investors, who owned 33 per cent of Malaysian government bonds in May, the highest proportion in Southeast Asia, will pull funds out as the US outlines plans to rein in monetary stimulus. The Federal Reserve will conclude a two-day policy meeting today in Washington that may shed light on the timing of such a move.

The 10-year Treasury yields climbed 97 basis points, or 0.97 percentage point, to 2.59 per cent since reaching this year's low on May 1. Malaysia's 10-year bond yield rose 70 basis points to 4.06 per cent in that time.

Technical indicators suggest the ringgit's decline may have reached the extreme. At yesterday's close in Kuala Lumpur, the ringgit was 0.1 per cent weaker than the upper limit of the Bollinger Band. The currency breached its normal trading range this week for the first time in a month.

Bollinger Bands, developed by John Bollinger in the 1980s, are used by technical analysts to identify the turning point in an asset's trajectory. The limits represent two standard deviations from the 20-day moving average, implying that the likelihood of a currency moving outside the band is rare.

The "k-line" of stochastics, which measures current price relative to highs and lows, has increased to 83.6, above the 80 threshold deemed as oversold for the ringgit. A dollar-sell signal is confirmed as the k-line crosses below its own moving average, or "d-line," which was at 83.9.

The currency will strengthen 1.8 per cent to 3.17 per dollar by the end of December, according to the median of 27 forecasts compiled by Bloomberg.

BNP Paribas SA predicts rising debt levels will trigger a bond and currency selloff as Prime Minister Datuk Seri Najib Razak presses ahead with a 10-year US$444 billion spending programme aimed at lifting the nation to developed status by 2020. The slowdown in China, Malaysia's second-biggest export market, is also weighing on the country's assets, according to the Paris-based lender.

Malaysia's debt-to-GDP ratio of 53.5 per cent is higher than the 25 per cent in Indonesia, 51 per cent in the Philippines and 43 per cent in Thailand, data compiled by Bloomberg show. It's also approaching the government's 55 per cent limit.

"With China slowing and Fed tapering expected to impact inflows negatively, this will amplify worries over debt sustainability," Singapore-based BNP analysts Yii Hui Wong and Mirza Baig wrote in a July 29 research note. They cut their year-end forecast for the ringgit to 3.25 per dollar from 3.15.

While Malaysia's current-account surplus will narrow to six per cent of GDP this year, from 6.1 per cent in 2012 and 12 per cent in 2011, it's higher than the average 2.8 per cent in Asian countries and 2.4 per cent for China, Bloomberg surveys show.

Malaysia's "fundamentals of a current-account surplus and sustained growth should warrant a correction in the recent weakness in the ringgit," according to a July 25 report from Morgan Stanley analysts led by Hans Redeker, the head of global foreign-exchange strategy in London.

Bank of America strategists including Christy Tan recommended their clients use options to buy the ringgit, saying the central bank will sell foreign reserves to shore up the currency should the decline deepen.

"We believe that Bank Negara Malaysia is well prepared to defend against a ringgit selloff event," Tan wrote in a note to clients on July 22. "In the event of a return in appetite for regional bonds, the ringgit is well positioned to outperform in the region."-- Bloomberg