Ringgit under pressure from dollar strength and divided Fed

The ringgit did not rally strongly on Monday’s oil jump but did weaken as US yields held firm


MALAYSIA’S ringgit came under selling pressure as US dollar gained on expectations the US Federal Reserve (Fed) will not cut its policy rate further this year and oil prices continue to backtrack gains.

The oil-linked local currency depreciated as much as 0.8% from last Friday to trade as high as RM4.1982 against the greenback yesterday — just shy of the RM4.20 mark — and is 1.5% weaker overall year-to-date.

The Fed also opted to lower the benchmark of US lending rate for the second time this year — a boon to regional markets such as Malaysia which were expected to welcome capital flows onto its shores as investors hunt for yield.

But, in delivering the 25-basis-point rate cut, the Federal Open Market Committee (FOMC) failed to come to a unanimous decision again, lowering the case for the Fed to cut interest rates further this year.

Oanda Corp senior market analyst for Asia Pacific Jeffrey Halley said the Fed’s intention to not lower interest rates again as evidenced by the FOMC members’ dot plots came as a real surprise to the market.

“We saw US yields rise slightly and the dollar jump in value as the yield differential story looks set to remain in play larger for longer,” he told The Malaysian Reserve (TMR).

He noted the ringgit did not rally strongly on Monday’s oil jump but did weaken as US yields held firm and the greenback rose.

“This implies that the US monetary policy and its overflow effects on Asia is a much more important determinant to the ringgit than the price of oil at these levels.”

It was an eventful week for global financial markets after attacks on major Saudi Arabian oil sites put 5.7 million barrels or 5% of global daily oil production offline, causing Brent futures to spike 19.5% on Monday to US$71.95 (RM301.47) per barrel.

But oil has been reversing its gains over the past couple of trading days as Saudi Arabia said it restored 50% of the disrupted supply while production is expected to normalise as soon as the end of this month.

Halley said the foreign exchange market is far too complacent over developments between Saudi Arabia and Iran.

While Yemen’s Houthi rebels claimed responsibility for the attack Saudi Arabia’s Defence Ministry said weapon debris from the site of the attack proves Iran’s involvement.

Tehran denied any involvement and further warned that it would retaliate against any action taken against it. Saudi Arabia is allied with the US whose Secretary of State Mike Pompeo labelled the attack as an “act of war”.

Halley said the US dollar-ringgit exchange is parked in the middle of its September range for now and will trade with a bias to the upside.

“A test of the recent highs above RM4.22 may be on the cards as the dollar, in general, remains strong. Only a breakthrough at the US-China trade talks in the near term would cause me to reassess my strong dollar view.”

AxiTrader Asia Pacific market strategist Stephen Innes said the ringgit is falling under a three-pronged attack of lower oil prices, a weaker Chinese yuan and the less-dovish Fed.

Speaking to TMR, he said the Fed putting a pause on further rate cuts in 2019 will see Malaysia’s central bank less inclined to move rates when it meets for the last time this year in November.

“They do not want to trigger a negative move on the currency and create capital outflows. A less dovish Fed narrative will make local central banks think twice about rate cuts,” he said.

Innes said the recent yuan weakness is overdone and has been dragging down the ringgit which bears a close relation to the performance of the Chinese currency.

“The market continues to gravitate to the RM4.15 to RM4.20 level for the ringgit. I am much more bullish as I see the yuan trading below seven into year-end and the ringgit trading to RM4.10 (against the dollar).”

“In the meantime, I expect RM4.20 to be the huge top with the market gravitating back towards RM4.1650 as trade war calm sets in.”

The ringgit’s losses this week show just how volatile the market is as the local note is expected to gain from prospects of higher oil and the Fed threading a path of monetary easing.

Its performance for the year is a testament to this volatility, having appreciated 1.7% against the dollar to RM4.0610 on March 21, supported by a dovish Fed, before falling 3.3% to RM4.1940 on May 29.

The depreciation was largely driven by external factors such as the escalation in US-China trade tensions and prospects of FTSE Russell dropping Malaysia from its World Government Bond Index following a review this month.

Malaysia’s local note hit a 22-month high of RM4.2203 on Sept 3 this year.