Ringgit to rally on domestic impetus, central bank rhetoric

The local note has traded between RM4.06 and RM4.09 against the US dollar since early February


DOMESTIC catalysts are needed to spur the ringgit out of its rangebound value over recent months and currency traders are looking to central banks to provide the impetus.

The local note has traded between RM4.06 and RM4.09 against the greenback since early February, despite the dovish US Federal Reserve (Fed) stance in 2019.

Foreign selling of Malaysian financial assets amid tepid domestic economic data has held back the ringgit, despite a rally in crude oil prices.

Most recently, Malaysia’s export numbers in February fell 5.3%, while its manufacturing index hit a three-month low in March.

SPI Asset Management head of trading and market strategy Stephen Innes said the foreign-exchange market is trading with a “natural bias” this week as it awaits the next catalyst — which will likely emerge domestically.

“For the ringgit to make significant headway, there will have to be a domestic economic uptick which will remove Bank Negara Malaysia’s (BNM) dovish bias and support the ringgit,” he said in a research note this week.

“Nonetheless, I expect the ringgit to gradually appreciate due to the softer Fed policy profile and a weaker US dollar as global growth picks up in the second half of 2019 on the back of stimulus (from the US and China’s respective central banks).”

Innes said commodity-linked currencies like the ringgit will benefit from a trade deal between the US and China, as well as improved prices and demand for crude oil and palm oil prices.

“A pick-up in both these critical Malaysian export sectors will certainly keep BNM on hold, if not remove a dovish bias.”

Representatives for Washington and Beijing have entered into the final leg of trade talks this week and are bringing less antagonism and more cooperation to the table in hopes of finalising an agreement.

A trade truce between the world’s largest economies would be a massive boost for global growth and — coupled with an end to the US rate-hike cycle — benefit the ringgit and other emerging-market (EM) currencies.

It is here where the outlook for the ringgit is muddled, as the Fed’s dovishness is based on the very real fear of an economic slowdown occurring which, if left unchecked, could lead to a recession.

The US Treasury yield curve inverted for the first time since 2007 at the end of last month, causing many investors to preemptively move to safe-haven assets in anticipation of a recession.

FXTM chief market strategist Hussein Sayed, in a release yesterday, said inversions in US Treasury yields correctly predicted US recessions in the past, and that the inversion noted last month is a warning signal to markets.

He said past yield curve inversions tended to precede economic recessions in about six to 18 months, but investors generally begin selling risk-based assets well before a recession occurs.

“They don’t wait for a recession to hit. That’s why economic data releases in the first few weeks of the second quarter will play a significant role in determining whether to hold onto risk assets or begin liquidating positions,” he said.

A US recession could precede a global economic slowdown, which is bad news for the ringgit and its EM peers.

Oanda Corp senior market analyst Jeffrey Halley said the ringgit will find no solace in a structural global economic slowdown.

“In this scenario, I believe the US dollar will rally on safe-haven inflows as a high yielder among developed market currencies. In this case, the ringgit, along with EM currencies, could all suffer,” he said.