The ringgit should benefit from the Fed pro-cyclical rate cut even more if they cut 50 basis points

by MARK RAO / pic by BLOOMBERG

THE ringgit ended the week flat against the US dollar as falling oil prices offset expectations that the US Federal Reserve (Fed) will slash its key interest rate as much as 50 basis points at the end of the month.

It closed at RM4.1128 against the greenback last Friday, only slightly lower than the RM4.1130 managed a week prior, as Brent oil declining approximately 6% over the same period put pressure on the commodity-linked currency.

“If not for weaker oil prices, the US dollar-to-ringgit exchange would be testing the RM4.10 level as improving risk sentiment and the chase for yield will benefit the local unit,” Vanguard Markets Pte Ltd managing partner Stephen Innes said in a research note.

He said the recent dovish comments from Fed representatives further tilted the balance towards a 50-basis point rate cut when the US central bank meets at the end of July.

While widely expecting the Fed to cut its benchmark lending rate, markets differ on the quantum to be deployed by the central bank as it adopts monetary easing amid concerns over global growth and rising trade risks.

“The ringgit should benefit from the Fed pro-cyclical rate cut even more if they cut 50 basis points, which after the latest round of Fedspeak does suggest a stronger policy response remains on the table,” Innes said.

It is no secret that emerging market and risk-based currencies like the ringgit stand to benefit from the Fed-led monetary easing, as this will whet risk appetite among investors hunting for yield.

An aggressive Fed rate hike cycle in the past, which saw lending rates raised four times last year, was the predominant factor driving ringgit weakness as investors fled to the US bond market for better returns.

As it stands, markets have not ruled out further rate cuts by the US central bank this year. The Fed is scheduled to meet three additional times this year aside from July.

But gains for the ringgit were largely kept in check by the recent decline in crude oil prices as Brent oil traded between US$62.50 (RM256.88) and US$63.32 per barrel last Friday.

OANDA Corp senior market analyst Alfonso Esparza said easing geopolitical tensions in the Middle East, namely between the US and Iran, brought demand concerns to the forefront of the oil market.

“Less geopolitical risk pressure on crude prices gave way to supply and demand fundamentals. Another weekly drawdown of inventories in the US and surprise build-ups in petrol and distillates added to the oversupply narrative,” he said in a research note.

He said oil prices are facing supply glut pressures as both the Organisation of Petroleum Exporting Countries (OPEC) and the US Energy Information Administration lowered their demand forecasts for 2020.

“While the OPEC+ deal was extended, it cannot do more than add stability even in a spiralling down of crude pricing.”

Brent oil had rallied 38.6% from the start of 2019 to hit a year-high of US$74.57 per barrel on April, but was largely tilted towards supply dynamics in the market.

The recent monetary easing adopted by major central banks across the globe, not to mention the ever-present risk of a flare-up between Washington and Beijing, is creating demand concerns for the market.

Consequently, crude oil prices tumbled some 15% since its year-high in April.