Hold on to the ringgit despite safe-haven currencies’ appeal, says currency analyst

Innes expects the ringgit to hit 3.90 against the greenback by the end of 2020


THE fluctuations in the currency exchange rates can be a headache for investors, businesses and parents with children studying abroad or travellers. The change in the exchange value also presents an opportunity to make some gains.

Not surprisingly, banks in Malaysia offer foreign currency savings accounts as an alternative form of investment or savings.

However, finding the right currency to keep your money is not an easy task. Bank Negara Malaysia’s move to cut its Overnight Policy Rate by 25 basis points to 2.75% yesterday saw the ringgit strengthen against the US dollar instead of weakening as one would expect based on basic exchange fundamentals.

The US-China trade war and Brexit cast a long shadow on the currency market in 2019. Subdued economic growth and geopolitical risks continue to influence the health and value of currencies.

While a foreign currency account can lower risk to exchange rate volatility, choosing the currency that could offer the best appreciation prospects or exchange rate stability requires knowledge of the market.

From a big macro view, the Phase 1 agreement signed this month between the US and China is expected to inject much needed stability in the currency market, and the completion of UK elections combined have cleared up tail risks, but the market is now transcending that euphoria.

“While Phase 1 is already reflected in equity prices, positioning is still relatively light, and with plenty of capital yet to be deployed, markets could even push significantly higher supported by the global growth rebound which can shift funds out of the US dollar into lower valuations around the globe,” said Stephen Innes, chief market strategist at AxiTrader Ltd.

Here, we take a look at the currency that holds the prospect of profit for investors.

Hold On to the Ringgit

The ringgit has gained on the back of progress made in US-China trade talks, as well as a recovery in prices of commodities like crude palm oil (CPO) and crude oil.

The local unit’s performance is still largely co-dependant on external factors said Innes, but he is optimistic it could make gains against the major unit.

“The macro view should favour steeper curves in Asia (particularly, in low yielders) and scope for catch-up in foreign-exchange spot returns in more export- and equity- sensitive currencies like Malaysia.

“The ringgit is looking cheap. I think the ringgit could be in for the sleeper trade entering 2020, notably absent of the tail risk from trade,” Innes said.

The currency analyst with more than 25 years of experience in the Group of 10 and Asian currency market, precious metal and oil markets, expects the ringgit can hit 3.90 against the greenback by the end of 2020.

Asian Flu Scare

While investors are two minded about the greenback or fleeing to safe haven currency, the latest health epidemic in Asia could hurt traditional defensive currencies like the yen.

Investors for years looked to Japan to guard currency investments — thanks to its large current account surplus and foreign bonds. But it might not be the case this time around.

“Safe-haven trades usually favour the yen, but the new risk around spiking oil prices and an Asian virus scare don’t suggest the yen is the safest haven. Ultimately, if you want to play it safe this year and don’t want to take on the Asean risk, I think the long US dollar is the safest play,” Innes said.

He does not write off Asian currencies as the outbreak is still at a preliminary stage and preventive measures are in place to contain it.

“While the risk is returning to the market, the lights might not turn green until we move through the Chinese New Year travel season to better gauge the coronavirus dispersion. So, it could be a bit too soon to drop your guard, especially in the Asean market which sits at the epicentre of the risk tumult,” Innes explained further.

Although an antibody has reportedly been discovered, the timing of the outbreak couldn’t have been worse for Chinese mainland investors as the Asean region enters peak commerce and travel week with Chinese around the world welcoming the Year of the Rat.

Fed Holds Key on Greenback

The catalyst for US dollar could come from the US Federal Reserve’s (Fed) decision to either cut, maintain or increase interest rates going forward said Innes.

“I don’t think the dollar is going to have a great year, but it’s pro- bably not going to be as bad as some might think. Forecasting Fed policy is always a wild card at best, but taking the Federal Open Market Committee policy guidance at face value, the Fed on hold throughout 2020 is just about entirely baked into the cake. This suggests the dollar has little room to appreciate, given there could be economic-tail risk which has yet to feed through the US market from the current level of tariff,” Innes said.

He added, the American unit however, could still carry strong appeal standing out like a beacon against the backdrop of Asia’s coronavirus fears.

“The market was ill-prepared and underestimated the potential of the flu spreading, until yesterday, as the market was caught very long and wrong the Asean basket (of currencies).”