Ringgit on firm footing despite equity slump

The local note traded at RM4.07 against the greenback this week, continuing its momentum in 2019

By MARK RAO / Graphic By TMR

Positive external trade data and prospects of a US-China trade resolution kept the ringgit firm against the US dollar despite foreign investors dumping some RM448 million worth of Malaysian equities last week.

The local note traded at RM4.07 against the greenback this week, continuing its momentum in 2019 on anticipated monetary easing from the US Federal Reserve (Fed) and a resilient domestic economy.

Year-to-date (YTD), the ringgit appreciated approximately 1.4% against the dollar — a promising start compared to its performance which saw the Malaysian currency depreciated 4% last year.

Ringgit could make further strides this year and move closer to the RM4.00 mark or below, assuming a positive resolution from the ongoing US-China trade negotiations is reached.

FXTM research analyst Lukman Otunuga said Malaysia’s resilient economic data kept the ringgit on strong footing despite global growth concerns looming in the background.

“The slowdown in global economic growth is a narrative that could weigh negatively on the ringgit,” he told The Malaysian Reserve.

“However, such concerns are mitigated by the resilience of Malaysia’s external trade as seen in January’s positive surprise for exports.”

He said Malaysia’s exports growth of 3.1% year-on-year (YoY) in January this year exceeded market expectations of a 0.6% decline, bringing the country’s trade balance to RM11.5 billion. This was largely driven by export demand for electrical and electronics products.

The performance extends the domestic support found when Malaysia’s 4.7% GDP growth in 2018 came in within and above market expectations.

Foreign direct investment improving to RM12.9 billion and current account surplus widening to RM10.8 billion in the fourth quarter of the 2018 calendar year also bolstered the local note.

Recent reports that the US and China are closing in on a trade deal sent major regional and emerging markets (EMs) higher this week, as well as regional currencies who have a high beta to the Chinese yuan.

Gains for the ringgit, however, were limited as investor optimism did not translate into stronger buying interest for ringgit and ringgit- based assets.

Otunuga said it is likely that the optimism has already been priced in as evidenced by the ringgit appreciating 1.4% YTD against the US dollar.

“The ringgit seems more influenced by Brent futures as the currency appears to be ‘held back’ by Brent futures’ seemingly refraining from getting closer to the US$70 (RM287) per barrel mark,” he said.

“Should optimism transform into reality where the US and China reach a concrete, positive resolution to ongoing trade tensions, this may result in a significant boost for Malaysia’s currency (and) see the US dollar-ringgit exchange headed closer to RM4.00.”

In spite of recent supportive economic data, Malaysia experienced deflation for the first time since the 2009 global financial crisis when its Consumer Price Index (CPI) contracted 0.7% YoY in January this year.

This reignited fears that Malaysia is due for a correction in 2019 as the last time the country registered negative CPI, from June to November 2009, the economy declined 1.5% that year.

Otunuga said Malaysia’s recent deflation numbers do not come with the same connotations as the previous bouts of deflationary periods experienced by the country.

“The CPI may better reflect domestic price pressures when the base effect readjusts going into 4Q19 after accounting for the Sales and Services Tax that was reintroduced in September 2018,” he said.

“For the full year (2019), Malaysia’s inflation is expected to inch higher but remain manageable around the 2% level, depending on how oil prices fare in the global markets.”

Going forward, Otunuga said markets will continue to sift through Fed commentary which maintains dovish tones at present.

“Any indication that the Fed will resume its rate tightening path could send the US dollar on a rally, hence, resulting in downward pressure for EM currencies.”

He added that a potential tail risk for the ringgit would be geopolitical risks flaring up between India and Pakistan over the conflict in Kashmir.

“Should heightened conflict signal investors to flee towards safe-haven assets, fund outflows from EMs will weigh negatively on the respective currencies.”