According to an analyst, the stars are currently aligned for the ringgit
by MARK RAO / pic by BLOOMBERG
The ringgit has been a standout performer this year, rising to its highest level in more than four months, returning some calmness to the country. The government has been blamed for the ringgit’s slump since the May 9 General Election (GE).
The ringgit was punished amid the global oil price slump from a four-year high, capital outflow from the country’s capital market, rising global trade tension and the US hawkish interest-rate hikes.
Investors repatriated their capital to stronger markets — with the US, Japan and a few others hitting new highs last year.
But the recent reverse in sentiment and improved commodity prices, coupled with fiscal consolidation, have traders projecting the ringgit to rise to RM4.05 against the dollar.
The local note had appreciated almost 0.9% less than two weeks into 2019 against the greenback, and outperforming domestic capital markets.
Over the past month, the local note had gained close to 2% against the dollar on abating headline risks of a dovish US Federal Reserve (Fed) and US-China trade reconciliation.
Malaysia’s commodity prices and fiscal direction had also brought respite to the currency.
The currency reversed from a year high of RM4.20 on Nov 28 to trade between RM4.09 and RM4.10 last Friday.
Year-to-date, the ringgit’s performance against regional peers has been mixed, appreciating 0.13% and 0.09% against the Philippine peso and Singaporean dollar respectively, but trading 1.6% and 0.42% weaker against the Indonesian rupiah and Thai baht.
Oanda Corp head of trading for Asia Pacific Stephen Innes said the “risk-on” signs are compelling on the dovish Fed stance, which will benefit commodity- and oil-linked currencies including the ringgit.
“Indeed, the stars are aligned for the ringgit with risk on, a dovish Fed, weaker US dollar, lower US bond yields and rising oil prices all suggesting the local unit could extend gains to the next critical support level around RM4.075,” he said.
He added that the currency could extend its gains against the US dollar to RM4.05 if a definitive trade war truce is reached between Washington and Beijing.
China’s economic slowdown would weigh heavily on the ringgit due to Malaysia’s trade exposure to the world’s second-largest economy.
Here are some of the factors that affected the ringgit in 2019:
A Game Changer Fed
Markets have heeded Fed chair Jerome Powell’s continued reassurances that the US central bank will be flexible in its policy decisions this year in view of slowing global growth prospects.
The expectation is that the Fed will hold off raising interest rates in 2019, suggesting that the central bank is nearing the end of its rate-hike cycle.
This has renewed investors’ interest in risk markets again — including Malaysia, where the export-oriented economy is enjoying more demands for ringgit and ringgit-based assets.
US interest rates were the key driver to the ringgit’s performance in 2018 as the US central bank opted to raise lending rates four times that year, causing investors to flock to US bond and fixed-income markets for better yields.
With the Fed and Bank Negara Malaysia expected to maintain rates this year, the ringgit will find support on the resultant weaker US dollar direction.
End of US-China Trade War?
Markets were rife with volatility in 2018 when the world’s two largest economies butted heads via targeted trade tariffs threats.
Washington imposed a 25% levy on US$34 billion (RM139.4 billion) worth of Chinese goods on July 6, with Beijing quick to retaliate in kind.
The trade narrative between Washington and Beijing had been a seesaw ride between escalation and reconciliation, with traders changing from risk-off to risk-on almost on a weekly basis.
Export-oriented economies were inevitably caught in the crossfire. Malaysia, who is dependent on trade with both US and China, was faced with worrying trade prospects going forward.
The 90-day truce entered by Washington and Beijing restored stability to the financial and currency markets, allowing the ringgit to find some firm footing.
While all is quiet on the trade war front for now, a failure to reach a definitive agreement would bring the trade fears back to the forefront and put the ringgit back at risk due to Malaysia’s trade exposure to China.
Improving Commodity Outlook
Crude oil prices had a volatile trading year in 2018 with Brent oil closing at a high of US$86 per barrel on Oct 3, before falling to as low as US$50 per barrel on Dec 24.
Oversupply in the market, coupled with heightened fears of a global economic slow-down, curbing oil demand and the waning influence of OPEC were factors behind the decline.
Market prospects have since improved and Brent oil rallied approximately 22% from Dec 24 to trade at US$61 per barrel last Friday.
Crude palm oil prices also recovered from the depressed November 2018 levels to trade at RM2,020 per tonne last Thursday.
The oil sector contributes about 18% to the country’s GDP and every dollar drop sends shivers to the market.
These are all positives to the commodity-linked ringgit, but crude oil prices are closely tied to global growth and a change in prospects could send oil demand tumbling again.
The rise of independent oil producers such as US shale drillers and questions over OPEC and Russia’s ability to influence the market, will serve to further exacerbate any potential decline.
Finding Domestic Support
Innes said the ringgit was perceived as one of the weaker links in the chain during the height of the sell-off last year, which saw global money move from risk-based assets to safe- haven assets such as the US dollar and Japanese yen.
He said the ringgit has generally outperformed other emerging-market currencies and is now playing catch-up after suffering from last year’s GE and the subsequent fiscal fallout.
“Under the correct circumstances, especially if the government remains fiscally prudent and with a combination of de-escalating trade tensions, higher commodity prices, weaker US dollar and dovish Fed, the ringgit could lead the pack again,” he said.
Malaysia’s planned ¥200 billion (RM8 billion) Samurai bond issuance is further expected to bolster the ringgit.
“Malaysia will soon issue the Samurai bond and, while the added money is always welcome, it will also remind investors that the fear of a credit rating downgrade has left the playing field,” Innes said.
Two weeks into 2019, the market is expecting a stronger ringgit to help brave a period of economic and financial resurrection of the country.