A measure of expected swings in the ringgit fell to an 11-month low on speculation Malaysia's widening current-account surplus will buoy the currency as the United States pares stimulus.
The excess in the broadest measure of trade increased to 17.5 billion ringgit (US$5.3 billion) in the fourth quarter, which would be the biggest surplus in a year, according to the median estimate of economists in a Bloomberg survey before data due at Wednesday evening.
The ringgit extended gains after China, Malaysia's top export market, reported growth in overseas shipments and imports beat forecasts.
One-month implied volatility, a measure of expected moves in the exchange rate used to price options, fell 33 basis points to 6.55% as of 11.27am in Kuala Lumpur, according to data compiled by Bloomberg. It reached 6.52%, the lowest level since March 14, 2013. The gauge has declined 135 basis points, or 1.35 percentage points, in seven days.
"Tonight's current-account data should show a fairly decent improvement," said Jonathan Cavenagh, a currency strategist at Westpac Banking Corp in Singapore. "As you've seen sentiment around equity markets and broader emerging-market sentiment calm down, the natural volatility is starting to subside."
Malaysia's benchmark stock index has rallied 1.1% this month following a 3.4% drop in January that was driven by concern China's growth is slowing.
GDP report
The ringgit strengthened 0.3%, the biggest gain since Feb 4, to 3.3228 per dollar, trimming its three-month loss to 3.4%, data compiled by Bloomberg show. It climbed as much as 0.5% earlier to 3.3175.
China's overseas shipments rose 10.6% in January from a year earlier, exceeding the median forecast of economists for a 0.1% increase, data showed on Wednesday. Imports increased 10%, versus a 4% predicted gain, resulting in a trade surplus of $31.9 billion.
Malaysia's statistics department may report later Wednesday that gross domestic product climbed 4.8% in the fourth quarter, after an increase of 5% in the previous three months, a separate Bloomberg survey showed before the data due at 6pm For the full year, GDP growth is predicted at 4.7% versus 5.6% in 2012.
Accelerating inflation is raising the likelihood that the central bank will boost the benchmark interest rate this year, currently at 3%, for the first time since 2011. Consumer prices climbed 3.2% in December, the fastest pace since November 2011. January figures are due Feb 19.
The yield on Malaysia's 3.26% government bonds due March 2018 advanced one basis point to 3.71%, while the yield on 10-year notes also climbed one basis point to 4.17%.
Barclays Plc sees a "high" probability of a Malaysian interest-rate increase this year, analysts including Singapore-based Rahul Bajoria wrote in a research note on Wednesday.