Sept 24 (Reuters) - The Malaysian ringgit, which weakened sharply on Wednesday on rising political uncertainty, faces another, possibly more potent threat Thursday when FTSE Russell announces its decision on whether it will retain Malaysian sovereign bonds in its World Government Bond Index.
Analysts at Morgan Stanley said last year that nearly $8 billion could leave Malaysia if it was dropped from the index while Goldman Sachs estimated outflows at $6 billion .
Exclusion from the index combined with the political power struggle that is certain to ensue after Malaysian opposition leader Anwar claimed a 'formidable' majority to form a new government and diminishing expectations for another interest rate cut could spur offshore investors to exit Malaysian bonds, which will weaken the MYR.
The dual risks come at a time when a fledging recovery in the Malaysian economy is already under threat from a worldwide resurgence of COVID-19 and heightened global financial market volatility. Political infighting leading to snap polls may deprive the economy of much-needed fiscal support .
Many analysts expect FTSE Russell to retain its present classification and weighting for Malaysian bonds due to improved foreign investor access to the government bond market and enhanced MYR liquidity .
USD/MYR faces strong resistance at 4.1740-4.1780, with a likely break extending the rally to 4.1980-4.2000.
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(Krishna Kumar is a Reuters market analyst. The views expressed are his own)
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