The ringgit could be most vulnerable to geopolitical risks in the form of North Korea, according to analysts
By MARK RAO
The ringgit — buoyed by stronger bond and equity yields in the country — is likely to trade at RM4.25 against the greenback due to heightened regional risk, said analysts.
Oanda Corp head of trading for Asia Pacific Stephen Innes said the weak US dollar performance has led to a wave of yield appeal throughout the region, with investors buying ringgit-denominated bonds and undervalued equities.
“It has been a consistent theme on the back of tepid US inflation data, which has seen a fair bit of regional inflow with the ringgit benefitting,” Innes told The Malaysian Reserve (TMR).
For the first-half of the calendar year (1H17), Malaysia issued RM51.6 billion worth of bonds — represent- ing a 45% increase from the same period last year.
Global funds have also started to return to the Malaysian bond space this year, buying RM15 billion during April and May, versus RM59 billion sell-offs recorded for five straight months up to March, said Innes.
Meanwhile, the ringgit performed 0.06% higher against the greenback at RM4.2875 as at 2.45pm yesterday.
Since the start of 2H17, the Malaysian currency has been relatively stable up to August, ranging from a high of RM4.3008 to a low of RM4.2580.
Innes said Bank Negara Malaysia’s (BNM) move to liberalise its currency policy has resulted in the stability of the ringgit.
“Malaysia’s macro prospects look appealing and currency stability via the central bank’s policy is working,” Innes said.
“While some concerns remain over domestic liquidity, BNM’s more liberalised currency policy has investors cheering,” he added.
Rebounding oil prices have also supported ringgit growth, after coming off a choppy period from late May to the end of July this year — prices fell from a high of US$54.15 (RM232.30) per barrel on May 23 to a low of US$44.82 per barrel on June 21.
Oil prices opened yesterday at US$51.99 per barrel.
Innes said the recovery follows Saudi Arabia’s decision to trim output levels and requesting unwavering compliance from all OPEC members, though the oil price environment remains highly volatile.
“Concerns remain that this could still unravel, as supply cuts have less and less market impact in the face of US shale oil production,” he said.
“Nonetheless, higher oil prices are a near-term positive for emerging markets (EMs) and oil-exporting nations like Malaysia should benefit from improving sentiment,” he said.
Innes added that the ringgit is still exposed to risks, namely a steeper reprise of the US Federal Reserve (Fed) rate curve, more aggressive Fed balance sheet reduction and North Korea denting regional sentiment.
He said the main concern among investors is that the market is under-pricing the Fed’s rate hike trajectory in 2018, as normalising US inflation would act against EMs.
In June this year, earnings growth for companies in the MSCI EMs Index exceeded 13%, while only registering a 0.3% growth in January of the same year.
Innes said appeal for the ringgit comes from both a dovish Fed and buoyant risk sentiment.
“The ringgit has been the beneficiary of the dovish Fed narrative — but if this view continues to shift, it could present some near-term headwinds for the currency,” he said.
However, the ringgit could be most vulnerable to geopolitical risks in the form of North Korea, with the country most recently threatening air strikes on Guam.
“I believe the Fed will remain very dovish through 2017, given the US’ political and geopolitical uncertainties, but the wild card will be the escalating North Korea tensions which could severely dent regional sentiment,” he said.
Innes said the ringgit is anticipated to strengthen based on the carry — bond and equity yields — towards the end of 2017 gradually.
“However, given the heightened regional risk (North Korea), I believe RM4.25 may be the base for the year.”
Meanwhile, Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said geopolitical developments, especially in North Korea, are creating a risk-off trade which could limit further appreciation of EM currencies, including Malaysia.
“Barring any unforeseen circumstances, the ringgit should trade within RM4.10 and RM4.20 by the end of the year,” Mohd Afzanizam told TMR.
“Improving growth and corporate earnings could be the main factor for more inflows of funds from abroad,” he said.
He added that the decision of the US rate rise, Europe’s and Japan’s state of monetary accommodation have been the factors in the current performance of the ringgit.