By MARK RAO
THE ringgit is poised for further gains this year on the favourable US-Malaysia interest-rate differential, after emerging as the bestperforming Asian currency against the dollar last week.
Malaysia’s local note made up lost ground against the US dollar in the past week, appreciating 0.7% from the week prior as Bank Negara Malaysia (BNM) kept interest rates steady, while Washington and Beijing reportedly agreed to a phased removal of trade tariffs.
The current interest-rate differential between the US federal funds rate and Malaysia’s Overnight Policy Rate is at 125 to 150 basis points, Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said.
“In other words, there is a yield pick-up if foreign investors switch their investment to ringgit,” he told The Malaysian Reserve (TMR), adding that the ringgit is also perceived as undervalued.
However, he said the ringgit sustaining a rally is contingent on US-China trade developments, amid an over 15-month trade war that has rattled financial markets and seen billions of dollars’ worth of goods slapped with tariffs.
“If both countries could find some common ground and are able to reach a meaningful (agreement), perhaps the prevailing trend (of a stronger ringgit) could be solidified,” Mohd Afzanizam added.
Last week, a spokesperson for China’s Ministry of Commerce said both Washington and Beijing have mutually agreed to rollback trade tariffs in stages as part of a “phase one” trade deal. This interim deal could be inked before year-end.
FXTM market analyst Han Tan said the ringgit was Asia’s best performer against the greenback for the month up to Nov 8, aided by Malaysia’s sound economic fundamentals and accommodative monetary policy stance.
The rollback of existing trade tariffs, if materialised, will alleviate downward pressure on global trade conditions, serving as a tailwind for open and trade-dependent Asian economies, while boosting the prospects of a global economic rebound.
“Still, external factors remain the primary driver of the ringgit’s performance, and there remain notable risks,” Tan told TMR.
“Geopolitical uncertainties, lingering trade disputes and commodities volatility still feature in the ringgit’s outlook.”
Thus, markets will keep a close watch on both Malaysia’s third-quarter GDP print and US-China trade developments, especially as any negative surprises from the latter could derail chances of the ringgit rallying.
The ringgit is also a commodity linked currency and will thus be influenced by crude oil and crude palm oil (CPO) prices.
Positive progress on the US-China trade front will bolster oil prices from a demand perspective as both countries are the largest oil consumers in the market today.
However, this could be negated or limited by US oil production and inventory build.
CPO prices, meanwhile, have been on an uptrend as the fourth quarter of the year is typically a period of low production, but larger demand concerns remain on prospects of India curbing its Malaysian palm oil imports.
Tan said the next support level for the US dollar-ringgit pair can be drawn at the 4.12 mark after breaking below its 50-, 100- and 200-day moving averages.
“Another significant bout of risk-on sentiment, coupled with more dollar moderation and yuan strength, could then bring the 4.10 support level into focus,” he said.
Oanda Corp senior market analyst for Asia Pacific Jeffrey Halley said the ringgit’s ability to sustain a rally is contingent on the US-China interim trade deal and its further progress.
“At present the noises are positive and, if that continues and something is written in stone with a signing date, the rally in the ringgit and other regional markets can continue,” he told TMR.
“The ringgit could conceivably retest 4.06 against the dollar by the year’s end, possibly even four.”
Alternatively, if trade talks fail, the ringgit and most regional currencies will come under renewed pressure.
“Going into 2020, the most difficult parts of the trade talks lay ahead, and thus I would expect the feel-good factor to wane in the new year unless more breakthroughs are on the horizon,” Halley added.
The ringgit’s gains were not isolated against the dollar as the local note appreciated against the British pound, euro, Australian dollar and Singaporean dollar as well.
Halley said this has nothing to do with the ringgit in relation to these currencies itself, but has everything to do with the divergence in pricing of the US dollar.
“The positive trade noises have seen the US dollar rally against the Group of 10 currencies to reflect its better potential growth there, and fallen against emerging-market currencies, including the ringgit, reflecting their economies posttrade deal upside,” he said.