A roller coaster year thus far for ringgit

The local note has lost ground on fears that BNM will lower the OPR next month


There was much cheer when the ringgit rose to about a seven-month high this year. Markets were positive. Outflows had thinned. Oil prices were hitting new recent highs.

But the ringgit’s fortune has been reversed in the past week. The prospects of the central bank lowering the interest rate and a possible downgrade of local bonds have thrown a spanner to the local unit.

2019 started on a more positive footing for emerging-market (EM) currencies as the US Federal Reserve (Fed) had signalled an end to its interest-rate hike cycle.

This whetted investors’ risk appetite and drove the ringgit to rally 1.7% against the US dollar to RM4.06 for the year up to March 21 — an over seven-month high for the Malaysian currency.

The once-battered ringgit held its own despite a moderating economy and laggard equity market domestically, but bolstered by improving crude oil prices and sound fundamentals.

However, the local note since, has lost ground against the greenback and closed at RM4.14 on Thursday last week on fears that Bank Negara Malaysia (BNM) would lower the Overnight Policy Rate (OPR) next month.

Scheduled to meet on May 7, the Monetary Policy Committee is widely expected to lower the interest rate due to the deteriorating outlooks for both the domestic and external economies, coupled with benign inflation numbers.

The OPR sets the base lending rate in the country and a downward revision means lower yields and returns for investors of Malaysian bonds who are quick to pare down their exposure.

When FTSE Russell announced it might drop Malaysian bonds from the World Government Bond Index (WGBI), billions of ringgit worth of foreign holdings were at risk.

Investors were quick to sell on the headline risk, driving the ringgit lower against the greenback by approximately 2% since March 21 this year.

Global recession fears and prolonged US-China trade talks are creating a muddled outlook for the ringgit. But it is not all doom and gloom for the local note which is expected to gradually reflect its robust fundamentals.

Ringgit Oversold But External Risks Persist

FXTM market analyst Han Tan noted that the ringgit was among the best performing Asian currencies against the greenback in the first quarter of 2019, but came undone last week from the knee-jerk sell-off.

“The ringgit’s decline was steeper this week potentially due to foreign investors reacting in haste, following news that Malaysia might be dropped from the FTSE WGBI and Norway’s sovereign wealth fund’s holdings,” he told The Malaysian Reserve last Friday.

He said this was compounded by external factors, including the US dollar resilience and global growth concerns, but the ringgit is expected to reverse some of its losses in the near term as evidenced by last Friday’s rebound.

“The ringgit should continue to find support from Malaysia’s resilient domestic fundamentals, even as it contends with external headwinds that are beyond Malaysia’s control.”

Fears have largely been centred on the tepid economic data coming out of the US and China, which the dovish Fed has done little to assuage. A slowdown in the US and China, the world’s two largest economies, is bad news for the global picture on a whole.

Han said global growth risks remain tilted to the downside at the current juncture, with the ringgit expected to trade rangebound between RM4.10 and RM4.15 against the US dollar in this scenario.

However, a global recession is far from investors’ minds and risk sentiment remains resilient as evidenced by the drop in the gold prices and
rising stock markets globally, he said.

“Should the global economic outlook improve or trade tensions between major economies subside, that could propel risk-on sentiment further and ease the pressure on the broader EM complex, including the ringgit,” Han said.

Traders are sifting throughout headlines related to the US and China’s respective economies which are currently showing signs of stabilisation, indicating that the global synchronised deceleration will not be as steep as initially feared, he added.

Domestically, all eyes will be on Malaysia’s March inflation numbers after the country’s Consumer Price Index (CPI) was in the negative territory in the first two months of 2019.

Han said a meaningful return to the inflationary territory can help offset the ringgit’s loses against the US dollar.

The March CPI print could also prove the basis for whether Malaysia’s central bank opts to maintain or lower the OPR in May.

Ringgit’s Fortunes Not Isolated

The direction of the ringgit comes with the inevitable winners and losers, and nowhere this distinction is more obvious than that of net exporters versus net importers.

Malaysian planters, glove makers and semi-conductor manufacturers are generally net exporters and derive their primary income from abroad.

A weaker ringgit thus will benefit these players as they can capitalise on translation gains, whereas a stronger local currency will put pressure on their earnings and margins.

The volatility of currency markets is a norm for these companies who have hedging policies in place to minimise the impact of any foreign-
exchange losses.

In contrast, a stronger local currency is a relief to Malaysian companies whose input and raw material costs are predominantly US dollar-denominated.

This includes food and beverage giants Fraser & Neave Holdings Bhd (F&N) and Nestle (M) Bhd who are net importers. The latter, for example, finances 50% of its raw materials in the US dollar.

Similarly, the majority of local steel manufacturers’ raw materials are sourced from the US, and the bulk of input and operational costs for automotive and aviation companies are US dollar-denominated.

The latter category includes companies such as Bermaz Auto Bhd, UMW Holdings Bhd, AirAsia Group Bhd and AirAsia X Bhd. However, a stronger ringgit is usually followed by higher oil prices which would increase fuel expenses for airline operators.

Lastly, a stronger ringgit will ease companies’ debt repayments, specifically those whose borrowings are primarily denominated in foreign currencies.

Malaysia Airports Holdings Bhd, MISC Bhd, Sime Darby Plantation Bhd, Axiata Group Bhd and YTL Corp Bhd are among the companies who raise debt in foreign currencies and are poised to benefit from a stronger ringgit.