Capital outflow to remain threat to the ringgit amid trade uncertainty

The US dollar-ringgit exchange is caught up in the broader US dollar strength, rising US bond yields, says analyst


The ringgit fell past the RM3.92 mark for the first time since the start of the month last Friday as investors who were trimming down their exposure to Malaysian equities caused the local note to lose ground against the US dollar.

Foreign investors dumped RM299.1 million worth of Malaysian equities in the second week of March compared to the RM160.9 million bought in the week prior, according to MIDF Amanah Investment Bank Bhd.

This was the largest disposal noted since global equity markets underwent a mini-crisis early in February this year, prompted by growing trade tensions between the US and China, the world’s leading economies.

Oanda Corp head of trading for Asia Pacific Stephen Innes said the ringgit was negatively impacted by the regional outflow in equity markets, while also brought down by the stronger US dollar direction.

“The ringgit was underperforming last week due to the quarter-end repatriation flows, but now the US dollar-ringgit exchange is caught up in the broader US dollar strength and rising US bond yields.

“With risk sentiment waning, regional equity market will struggle and the threat of additional regional outflows as trade war rhetoric increases could dent all regional currency sentiments,” Innes said.

He said this would likely drag down the performance of the ringgit by virtue of its proximity in the region.

Since appreciating some 13% against the greenback in little over a year to reach a 21-month high of RM3.87 on Jan 26 this year, the ring- git has come under pressure from the dual threats of a hawkish US Federal Reserve course and US trade protectionism.

Over the past month, the local currency has depreciated by approximately 1.3% against the US dollar.

Ten-year US Treasury yields also reached 2.95% on Feb 21 this year though trended lower at between 2.81% and 2.82% last Friday.

Any movement past the 3% mark could entice traders to move into the US bond space at the expense of equities.

Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said the ringgit is still trading below its RM3.98 resistance level and is unlikely to move back past the RM4 mark anytime soon.

He added that inflows into fixed-income securities could help mitigate outflows in the equity market, thus easing some of the pressure weighing down the local currency.

“We noticed that Malaysia’s bond yields have trended down for Malaysian Government Securities (MGS) and Government Investment Issue (GII), so there could be inflows of foreign funds going into fixed-income securities, which could offset the outflows in the equity markets,” he told The Malaysian Reserve.

“In that sense, the ringgit depreciation could be contained.”

He said on a month-to-date basis, 10-year MGS yield fell by 10 basis points (bps) to 3.93%, while 10-year GII yield dropped 8bps to 4.15%.

Commenting on the direction of US interest rates this year, Mohd Afzanizam said markets are waiting for the results of the Federal Open Market Committee, which is scheduled to meet this Wednesday.

“The committee’s reading on inflationary pressures against a backdrop of the latest print for wages and the inflation rate will shed more light on the prospects of future rate hikes,” he said.

However, he cautioned that US trade policies becoming increasingly protectionist could lead to retaliation from other countries, an outcome that bodes unfavourably for export-oriented economies like Malaysia.