Ringgit to gain from rising oil prices

Rising oil prices will go a long way in boosting the govt coffers, says analyst


Malaysia’s encouraging macro-economic landscape, coupled with rising commodity prices, offers some support to the ringgit in the short term, according to analysts.

The local unit’s depreciation in value against major units is set to reverse in the coming months as investors cautiously regain their risk appetite for the region despite the Chinese yuan continues to be under considerable pressure.

“The local currency is trading stronger aided by a sharp move in the yuan, robust equity performance and improved risk sentiment, which is in complete contrast to last week’s markets tumult,” Oanda Corp Asia Pacific head of trading Stephen Innes told The Malaysian Reserve.

On July 2, the yuan fell through the psychologically significant 6.7 mark against the US dollar, hitting its lowest point in almost a year.

In the past two months, the Chinese currency has depreciated 4.3% against the greenback.

The analyst reckons it to be a natural market reaction to the US protectionist stance.

Over the same period, the dollar has appreciated about 5% against a basket of major currencies.

“However, rising oil prices will go a long way in boosting the government coffers.

“Ultimately due to the twin US deficits and the chance that the US Federal Reserve board may turn a bit dovish given all the trade war pressure, I think the US dollar will weaken into year-end, and this will be a boost o local currencies,” Innes added. Innes said the greatest asset Malaysia has besides a relatively healthy domestic economy is oil and in these times of zero spare oil production capacity, it is an excellent asset to have.

“At this current stage of trade war phase, there will be no severe fallout as the ringgit due to oil exports is better insulated than to weather tit-for-tat escalations,” he noted.

The ringgit strengthened 0.12% against the dollar yesterday to close at RM4.02.

Investors have been on edge recently with the US and China slapping levies on each other’s exports, spurring fears of a global growth slowdown, and hurting stocks and commodities.

The ringgit was initially under pressure due to the combination of post-election uncertainty, trade war fears and US rate-hike expectations.

ForexTime Ltd global research analyst Lukman Otunuga noted that the ringgit has noticeably appreciated in recent days, thanks to a softening US sollar.

He added that while further upside could be on the cards for the local currency in the near term, external risks in the form of global trade tensions and prospects of higher US interest rates are likely to continue, punishing emerging-market (EM) currencies like the ringgit.

“The ringgit will not be spared. If uncertainty continues to intensify amid the US-China trade tensions and the dollar stabilises, the trajectory of the ringgit could remain tilted to the downside,” Otunuga said, adding that a tit-for-tat trade war between the two powerhouses presents a significant risk to global stability and growth.

Otunuga reckons that intensifying trade tensions may fuel fears of increasing global protectionism, thus, negatively impacting economic growth in developing nations.

Such an undesirable scenario may spell more trouble for EM currencies and stocks.

“Perhaps, the outlook for the Malaysian economy remains encouraging, but a trade war has the ability to spark risk aversion — ultimately reducing appetite for riskier currencies like the ringgit and many other EM currencies,” he added.

Although Bank Negara Malaysia (BNM) has left interest rates unchanged since January 2018, further signs of the dollar aggressively appreciating could prompt the central bank to take action in the second half (2H).

“If BNM takes an action on the interest rates, it may in turn, support the ringgit,” he said.

Innes assumes the ringgit will need the US dollar to do a lot of the heavy lifting given the political uncertainty, to trade at 3.90 by year- end.

MIDF Amanah Investment Bank Bhd chief economist Dr Kamaruddin Mohd Nor is keeping a year-end target at 3.95 for the ringgit against the dollar.

“We foresee that the local currency will continue to be under pressure in the near term due to confluence of both domestic and external factors,” he said.

According to MIDF’s findings year-to-date, the ringgit has gained 0.28% against the US dollar, averaging at 3.9414.

Faster than expected interest-rate hikes in the US, a stronger US dollar, continued trade tension and geopolitical uncertainty are among the factors that influence ringgit negatively.

“Domestically, greater policy clarity can help to boost investor confidence,” he said.

Kamaruddin believes higher energy prices and resilient exports would help to cushion the value of the ringgit.