Can the ringgit continue to rise?
Ringgit

The local note has since found solid footing on a dovish Fed, but its direction is tied to the oil market

by MARK RAO / pic by MUHD AMIN NAHARUL

THE ringgit is set for further gains against the dollar as the US Federal Reserve (Fed) is widely expected to lower its key interest rate at the end of the month, but the local note remains susceptible to declining oil prices.

Vanguard Markets Pte Ltd managing partner Stephen Innes said a Fed rate cut of either 25 basis points (bps) or 50bps will be supportive for emerging-market (EM) currencies like the ringgit and liquidity amid a risk-on trading environment.

“Provided we do not have a significant sell-off on oil prices, we see the ringgit testing our July target of RM4.10 (against the US dollar) and will eventually move below, supported by a dovish Fed and the European Central Bank,” he said in a research note yesterday.

Innes added that the latter is set for a “looser” monetary policy which, coupled with a dovish Fed, should boost commodity prices.

“All around, it’s a win-win scenario for the ringgit in our view.” The Fed is scheduled to meet at the end of this month to decide on the benchmark US lending rate and markets are pricing in as high as a 50bp cut due to dovish comments from its chair Jerome Powell.

Markets have not ruled out any further rate cuts by the US central bank this year due to trade and global growth fears.

The Fed will meet three additional times this year aside from the July meeting, providing ample opportunity for monetary easing if it deems necessary.

Oanda Corp senior market analyst Craig Erlam said the US dollar will come under selling pressure as traders look elsewhere for better yields.

“The interesting thing about the interest-rate cycle that the US is engaging on is that global growth is far from terrible and any recessions are likely to be mild if they happen,” he told The Malaysian Reserve.

“Central banks are looking for a preemptive response that will hopefully prevent too much of a slowdown.”

He said EM currencies are expected to perform well against this backdrop as the US dollar comes under pressure, but to what extent, depends on how aggressive the Fed is in mitigating this slowdown.

“A lot has been priced in at this point, but traders appear in no mood to rein anything in yet, so more may well lie ahead.”

Year-to-date (YTD), the Malaysian currency appreciated approximately 0.6% against the US dollar after hitting a three-month low of RM4.10 on Monday.

Despite ranking among the best-performing currencies in Asia in recent weeks, it has been a volatile year for the local note due to key headline risks, namely prospects of FTSE Russell dropping Malaysian bonds from its global index and Norway exiting from the country’s bond market.

Protracted trade risks, largely fuelled by Washington-and Beijing-led trade tariffs, have also dampened risk sentiment and led to the flock to safety among traders at the expense of EM currencies.

The ringgit was the worst-performing Asean currency for the majority of April and May this year, depreciating 2.6% against the greenback from RM4.08 to RM4.13 over the course of the two months.

It has since found solid footing on a dovish Fed, but the direction of the commodity-linked currency is tied to the oil market, and a fall in crude oil prices threatens to reverse some of the ringgit’s recent gains.

“Given that Malaysia is a net oil exporting economy, slower growth and, therefore, weaker oil demand will be a downside risk for the economy and the currency,” Erlam said.

He said efforts by the OPEC and their allies to control production and, thus, prop up prices, coupled with the prospects of US-China trade agreement, are providing a bullish case for oil.

“The trade war is clearly a major risk for the global economy and will keep investors on edge, but I do expect progress here as neither side stands to gain from it heading into 2020.”

Washington and Beijing agreed to a trade truce during the Group of 20 summit in Japan, providing some respite on the global trade front, but this is by no means the definitive trade agreement markets were pining for.

The oil market will lose out from a re-escalation in the US-China trade tensions as both nations are the world’s largest crude oil consumers, collectively making up over 40% of total consumption in 2016.

Innes said headlines over the weekend, namely production from the US Gulf of Mexico normalising quicker than expectations and the tempering in the US and Iran tensions, exerted pressure on oil prices.

“But the more significant drag on oil markets is China’s weaker consumption data… trade war effects are taking their toll on China’s consumer’s spending habits,” he said.

“Indeed, the devil is always in the detail on China’s data dump.”

Crude oil had an equally volatile year thus far, rallying 38.6% to reach a year-high of US$74.57 (RM308.72) on April 24. The rally came off towards the tail-end of May on demand concerns and Brent oil traded between US$62 and US$67 per barrel this month.