The Malaysian Reserve

Cloudy future for ringgit though contagion effect not worrying

The ringgit extended Tuesday's loss to open slightly lower Wednesday morning dampened by a stronger US dollar (Pic By Muhd Amin Naharul/TMR)

By NG MIN SHEN / Pic By MUHD AMIN NAHARUL

There appears to be little respite in the near term for the ringgit although the local currency strengthened somewhat yesterday, after falling to a nine-month low on Wednesday as other emerging-market (EM) currencies tumbled during Tuesday’s sell-off.

The ringgit was at 4.1430/1460 against the US dollar as at 6pm yesterday, unchanged from its opening, versus 4.1460/1500 on Wednesday, although it fell against other major currencies including the Singapore dollar, euro, yen and pound.

Oanda Corp head of trading for Asia Pacific Stephen Innes was highly negative on the local note, citing ongoing global trade issues and a strengthening greenback that have aided the downfall in EMs.

“I don’t think we are going to see free trade into the US as we once knew it. Deferring infrastructure spending is negative, and given the soft GDP profile and tepid inflation, I expect the ringgit to trade at 4.20 against the US dollar by year-end,” he told The Malaysian Reserve in an email yesterday.

EM currencies recovered slightly yesterday as the US dollar retraced on reports of British and German governments dropping Brexit demands, which could allow the UK to cut a deal with the European Union.

As for Asian currencies, the Indonesian rupiah rose slightly to 14,893 against the greenback yesterday, after falling 14,777 per dollar on Monday, reporting its weakest in over 20 years and 8.93% down for the year to date.

The Thai baht also gained as foreign funds continued buying Thai bonds despite the dollar’s continued decline.

The Philippine peso fell due to expectations of an upcoming interestrate hike, while the Indian rupee gained slightly. The South Korean won rose to its highest in over a week.

Tuesday’s sell-off reignited fears of a contagion as seen when the Turkish lira’s downward spiral sent other EM currencies tumbling, although Innes rebuffed the concerns.

“I think some analysts are looking too much into the contagion issue.

“It’s not going to happen. The weakest links in the chain due to trade and budget deficits are in the crosshairs of currency speculators, causing some disruption in EM bond markets. This is a direct result of a strong US dollar and trade issues,” Innes said.

He added that local economies are “far better-positioned than they have ever been”, thus the sell-down is likely “a case of this too shall pass”.

According to the ING Group, despite the ringgit becoming an Asian underperformer after falling 1% against the greenback this week, the local unit enjoys better external payment support with widening trade and current account surpluses, unlike other underperforming Asian currencies like the rupee, rupiah and peso.

ING said Malaysia’s strong July trade data should be some relief for the ringgit, with the 18.7% year-on-year (YoY) US dollar-denominated growth in Malaysian exports for the first seven months of the year is the fastest in the region.

“We expect the ringgit to reacquire its status as an Asian outperformer once the ongoing uncertainty from the US-China trade war and the US dollar strength lifts,” it said.

ING also raised its year-end forecast for the ringgit against the greenback to 4.25, which is a lesser depreciation than its previous prediction of 4.35. On the home front, Bank Negara Malaysia (BNM) opted to maintain the Overnight Policy Rate at 3.25% on Wednesday amid downside risks from global trade tensions and domestic policy and supply uncertainties.

ING observed some changes between the central bank’s July statement and its Wednesday note, including a shift from claiming greater policy certainty to downside risks due to domestic policy uncertainty, and the omission of a reference to the ringgit being reflective of underlying economic fundamentals once external and domestic uncertainties recede.

“This possibly signals BNM accommodating the ringgit depreciation pressure in the ongoing EM sell-off,” it said.

Innes added that the central bank understands the need to avoid panicking the market at the current stage of EM tumult.

“My view is BNM will become increasingly datadependent, and if a policy shift is needed, it will be to the downside,” he said.