GE14 continues to exert pressure on the ringgit

Investors have also adopted a risk-off approach and scaled back their exposure to risk-based assets including the local note


Investors are holding off on ringgit-based assets in expectation of a closely contested 14th General Election (GE14), causing the local note to lose ground against the strengthening greenback.

Over the past month, the Malaysian currency has depreciated by 1.5% against the US dollar, reversing some of the gains when it closed at a fresh high of RM3.86 on April 2 this year.

Oanda Corp head of trading for Asia Pacific Stephen Innes said the ringgit has been weighed down by the ruling coalition’s “shifting game” of political candidates as GE14 draws nearer.

“The contest is shaping up to be much closer than expected, which has seen some bullish pre-election currency bets being pared back as we enter the final countdown to GE14.

“There was some interest to buy the ringgit ahead of a RM3.92 level to the US dollar by local traders but this continues to be overshadowed by the unwinding of foreign bond inventories,” Innes told The Malaysian Reserve (TMR).

Ahead of the polling day on May 9 this year, investors have also adopted a risk-off approach and scaled back their exposure to risk-based assets including the Malaysian currency.

While this has largely been driven by continued global trade uncertainties resulting from the US-China trade rift and rising US bond yields, investors in Malaysia are wary of what a change in government could mean for the country’s economic direction. Market attention is expected to be centred on the Goods and Services Tax (GST), which was implemented back in April 2015, while further investigations into 1Malaysia Development Bhd (1MDB) could be undertaken assuming a change in government.

“The cost of living in Malaysia has been a significant issue and will be right at the front and centre of the GE14 campaign, with the GST potentially being part of a shift in policy,” Innes said.

He added that the GST is viewed very favourably internationally to help shift the country’s dependency from oil-based revenues when prices plummeted to US$40 (RM157.60) per barrel, but is hugely unpopular locally.

“With oil prices higher today, the GST could be one of the possible adjustments from a shift in government point-of-view,” he said on Monday.

Innes said further internal investigations into 1MDB could be carried out as the state investment fund was is primary drivers causing the weaker ringgit during the peak of its decline.

While GE14 will be the main factor influencing the direction of the ring- git in the short term, the renewed US dollar strength will be of a greater concern to the local note over the long term, according to Innes.

He opined that the greenback has gained support on the rise in 10-year US treasury yields and the unwinding of US dollar short positions, but the ringgit remains poised to make another run at RM3.80 if US bond yields taper off, coupled with no electoral surprises locally.

Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said the ringgit will continue to trade in a tight range until the conclusion of GE14, while being encumbered by a stronger US dollar direction.

“We continue to believe that the ringgit will linger around RM3.85 to RM3.95 against the greenback for the rest of 2018, but we will closely scrutinise the currency pair should it break the current support level of RM3.82,” Mohd Afzanizam told TMR.

He said the higher inflation environment in the US has reignited talks of an aggressive course of US interest rates this year, thus pushing up the dollar index at the expense of the ringgit.

However, he said the Malaysian currency remains in an under- valued position and has upside potential to gain ground against the US dollar.

“The case for ringgit undervaluation is still intact premised on the nominal effective exchange rate and real effective exchange rate which hovers below the 100-point level,” he said.

“As such, upside potential still exists for the local note.”