SINGAPORE (REUTERS) - The Malysian ringgit steadied on Tuesday as profit taking emerged after the currency surged to a 21-month high in the previous session following the governing coalition's victory in national elections.
Central bank intervention also pulled the currency back, traders said.
The ringgit rose up to 0.7 per cent to 2.9595 per dollar earlier in the day, its strongest since August 2011, on demand from offshore funds and capital inflows, traders said.
But it later pared most of its gains, with the central bank spotted buying dollars around 2.9600 to stem its appreciation, they added.
On Monday, the ringgit saw its best day in nearly three years, gaining 1.9 per cent gain, after the ruling coalition extended its half-century rule despite its worst-ever performance in an election on Sunday.
The Barisan Nasional's (BN) victory eased worries about political instability and policy discontinuity in Southeast Asia's third-largest economy.
Still, traders and analysts said such gains were excessive.
"The current ringgit rally may be a slight overreaction in our view. While this ruling coalition retains power, its electoral mandate has clearly weakened," Maybank said in a note.
"Our economics team expects BN to deliver their populist pledges quickly and with a likely delay in SRP (subsidy rationalisation programme) resumption and GST introduction, we reckon fiscal consolidation could be an uphill task for the administration," Maybank said.
The government had planned to resume the SRP and introduce (GST to ease the budget deficit, but the plan has stalled for years on fears of a popular backlash.
Maybank revised its ringgit forecast for the end of the second quarter to 3.0300 from 3.0500 after the election, but the estimate is still weaker than the current level.
The Malaysian currency is also seen as technically overbought with dollar/ringgit's 14-day relative strength index (RSI) at 25.5, well below the 30 threshold.
A leading below the level indicates the pair is excessively sold.
"If dollar/ringgit cannot break 2.96 support, there is a chance of a bounce. We will creep back above 3.00 before the month-end," said a senior Malaysian bank trader in Kuala Lumpur.
However, the ringgit is expected to see more inflows as the uncertainty over the election waned, some traders said.
Malaysian exporters are likely to chase the ringgit, especially when it gets close to 3.000, they added.
"This week we should continue to see strength in the ringgit," said a foreign bank trader in Singapore, expecting strong demand around 2.9800.