Dollar pain is ringgit gain


Last year was a turning point for the ringgit, which rebounded from a 19-month low against a weakening US dollar and higher energy prices.

With prospects of better economic growth, the ringgit has continued its recovery path with a 4.3% appreciation against the greenback in the first quarter of the year (1Q18).

Moving into 2018, commodity prices have extended their recovery. Demand for oil has improved as global growth picks up pace and supply is expected to be managed by OPEC and non-OPEC producer until the end of this year.

World oil inventory is widely expected to decrease slowly. As such, this bodes well for the outlook of Brent crude oil prices going forward.

Given that Malaysia is a key exporter of energy products, the rising crude oil price is a plus for the local unit as this helps narrow the fiscal deficit.

Given the ringgit’s strong correlation to crude oil, a price stabilisation of crude oil at above US$70 (RM274.40) per barrel would argue for potentially a firmer ringgit value ahead.

Foreign investors have gradually returned to the local bond market since 2Q17.

Foreign ownership of domestic bonds increased to RM166 billion by end-March 2018 from RM136 billion in March 2017 driven by the aforementioned positive factors and confidence in Malaysia’s economy.

With the passing of the 14th General Election (GE14), which will be held next month, a further paring of the political risk premia is likely to sustain foreign investor’s appetite for Malaysian bonds and be a positive sign for the ringgit’s future valuation.

An additional factor that could technically lift the value of the local unit is a weaker US dollar.

The US dollar index, which measures US dollar against a basket of six currencies, nose- dived to a three-year low of 88 levels at the end of January from 92.5 at the start of the year on concerns about a US government shutdown, as well as Donal Trump and Steven Mnuchin’s weak dollar tone.

In February and March, the sell-off in the equities market and the US Federal Reserve’s rate hike failed to give dollar a material lift.

In terms of market sentiment, growing concerns about the escalating trade protectionism and the federal deficit is leading to a weakening US dollar.

Even world central banks seem to be losing faith in the mighty greenback, with their US dollar share of allocated foreign-exchange reserves now sitting at a four-year low.

While we are not penning a weaker dollar narrative at this juncture, we do not see a lasting recovery for US dollar on the horizon.

The ringgit, we believe, is likely to stabilise (RM3.85-RM3.90 against US dollar) at current levels in the near term, given the market has sufficiently priced in the positive factors.