Can the ringgit rise brave the global storm?

The local unit has risen by 0.42% against the greenback since the start of this year amid concerns that the US economy has peaked and could go on a tailspin


The ringgit has been one of the best performing currencies in the region against the US dollar since the start of the year but worries remain whether the rise of the currency can be sustained as the world braces for greater uncertainties.

The local unit has risen by 0.42% against the greenback since the start of this year amid concerns that the US economy has peaked and could go on a tailspin.

Higher global oil price, which Malaysia benefits from the rise in price of the commodity, helped the ringgit to erase much of the losses from last year.

The local note had appreciated 1.7% from the lows of RM4.18 against the greenback a day before Christmas last year.

Against its regional peers, the local unit has appreciated against the Singaporean dollar, Thai baht, Philippine peso and Indonesian rupiah since early this year.

A less retaliatory tone by Washington and Beijing over their tariff spat and a more accommodating mantra by the US Federal Reserve (Fed) on interest-rate hikes have boosted the ringgit’s rise.

But with the US economy said to have reached its highs, a change in trajectory in the world’s largest economy could spell disaster to currencies like the ringgit.

Oanda Corp head of trading for Asia Pacific Stephen Innes said global risk sentiment is pinning a lot of hope on the thawing of the US-China tensions which could just be temporary.

“Fortunately both the US and China’s central banks are providing a backstop for risk which should support general risk sentiment and commodity outlook,” he told The Malaysian Reserve (TMR).

“In my view, the lower rate hike trajectory by the Fed has been a significant driver for the ringgit rally,” said the currency analyst.

The ringgit’s rise has been a respite after the currency declined from RM3.86 in March to as low as RM4.20 in November against the greenback.

However, he cautioned that the market may be pricing in a far too dovish Fed and that the tightening of the central bank’s balance sheet will be a stronger driver for the greenback going forward.

He added that a slowdown in the Chinese economy is the biggest risk facing the ringgit as this would hurt global growth sentiment and weigh in on commodity prices.

Meanwhile, FXTM chief market strategist Hussein Sayed said 2019 is likely to see a synchronised global slowdown — the inverse of the global synchronised economic growth observed in 2017.

“Many indicators have indicated a peak in the US economic cycle, including most recent economic surveys, financial conditions, housing data and the inversion of the US Treasury yield curve,” he said in a research note yesterday.

“Adding this together with trade tensions, political risk, fading fiscal stimulus and a tighter US monetary policy, the economic outlook is expected to look much more vulnerable in 2019,” he said.

Fitch Solutions Asia country risk analyst Darren Tay said the ringgit’s rebound is expected to be short-lived due to local uncertainties and external risk.

“The recovery is more due to the US dollar weakness following dovish signals from the Fed that the pace of hikes could slow in 2019,” Tay told TMR.

“Sentiment could remain unfavourable to the ringgit, especially given the risk of continued political and policy uncertainty in the country.”

He said the latter incorporates two core assumptions which are centred on political developments and commodity prices.

“On the political side, we are assuming a benign transition from Prime Minister Tun Dr Mahathir Mohamad to Datuk Seri Anwar Ibrahim in slightly more than a year and for identity politics to remain under control, failing which the ringgit would likely weaken significantly,” Tay said.

“On the economic side, our forecasts incorporate an average Brent crude price of US$75 (RM307.50) per barrel in 2019, which would support the ringgit as 15.3% of total exports in 2017 were in the oil and gas category,” said Tay.

On the developments between the US and China, Tay said it is unlikely that a lasting resolution to the trade dispute will be reached as the two countries remain far apart on key issues.

“The 90-day truce period negotiated at the Group of 20 summit will likely end with a re-escalation of trade tensions, which would further drive sentiment against emerging markets, including Malaysia, and weigh on the ringgit.”

Meanwhile, FXTM research analyst Lukman Otunuga said the commodity-linked currency found support on recent US dollar weakness, speculation that the Fed is to take a pause on rate hikes this year and renewed optimism over the US-China trade talks.

“While the rally could extend on the US dollar weakness, upside gains remain capped by rising geopolitical risks,” he told TMR.

“With concerns over plateauing global growth and fears of a slowdown in China’s growth momentum weighing on sentiment, the ringgit could face headwinds down the road,” he said.