US bond yields, GE14 factors holding back ringgit appreciation

After appreciating to its strongest level since mid-2015 at RM3.86 on March 28, the local unit has been  losing ground against the greenback


THE ringgit is stuck range bound against the US dollar as traders accommodate for mixed market signals including higher US bond yields and the impending general election, offsetting the support otherwise provided for by rising oil prices.

After appreciating to its strongest level since mid-2015 at RM3.86 on March 28, the local unit has been losing ground against the greenback and traded at the RM3.89 mark yesterday.

This was in spite of geopolitical risks and continued OPEC support that had pushed crude oil prices past the US$74 (RM296) per barrel mark on the Brent index yesterday.

Normally, a beneficiary of higher oil prices, the commodity-linked currency has been brought down by overall weak sentiment and nearterm demand.

“Despite surging energy prices, the US dollar-ringgit exchange has remained mired in a very tight trading range as traders are dealing with some shifting narratives.

“Higher oil prices usually play favourably for the ringgit, but with the 10-year US Treasury yields approaching 3% and a broadly firmer US dollar, local note dealers are waiting for more favourable levels to buy the Malaysian currency,” Oanda Corp head of trading for Asia Pacific Stephen Innes said.

The 10-year US Treasury yields rose to a high of 2.97% yesterday, gaining considerably from Sept 8 last year when bond yields were at 2.05%.

A move past the 3% mark would likely prompt investors to move into the US bond market at the expense of global equities, thus reducing demand for currencies such as the ringgit.

Innes said sentiment for the local note will remain weak over the short term, especially when factoring in the election risk premium, as markets shift their attention to higher US yields.

“Over the longer term, however, medium-term macro conditions and low domestic inflation should make Malaysian Government Securities attractive and support the ringgit over time,” he said.

The 14th General Election (GE14) will be concluded come polling day on May 9 this year, but has kept investors at bay from Malaysian capital markets as reflected by the muted activity in the country’s bond space.

According to BMI Research, the GE14 is creating uncertainties over the direction of Malaysia’s economy and is holding back traders from overextending their exposure to the local currency.

“Election uncertainty is likely a factor weighing on the ringgit as investors refrain from going bullish on the currency ahead of the closely contested GE14,” the research house told The Malaysian Reserve in an emailed reply.

On the US dollar front, Innes said the big sell-off in global fixed income is providing the greenback with a solid foundation.

“Higher US yields have played a role in supporting the US dollar as surging oil prices make for a compelling inflationary storyline,” he said.

A host of geopolitical risks in the Middle East, encouraging OPEC and non-OPEC compliance and bullish oil price forecasts have contributed to the higher oil price environment.

Innes said oil markets are looking at US$75 per barrel as the next key resistance level on the Brent index, with the possibility of reimposed sanctions on Iran the focal point up to May 12 this year.

“US shale production remains the big elephant in the room, but the market is now factoring in the possibility of China’s economy slowing down quicker than expected, partly due to deleveraging but as much to do with trade war escalation,” he said.

At present, global trade fears have eased slightly after US Treasury Secretary Steven Mnuchin announced that he is considering a trip to China to reach an agreement on recent trade disputes between the two countries.