The bearish development in the energy market adds to the political and policy factors weighing negatively on the ringgit, says economist
by SHAZNI ONG & FARA AISYAH/ pic by BLOOMBERG
THE ringgit is expected to endure a rough patch this week as prospects of lower oil prices have a negative impact on the local unit that has already been under pressure due to heightened concerns over Covid-19 outbreak.
The breakdown in talks between OPEC and Russia to manage supplies in the market last week has raised concerns major producers like Saudi Arabia and Russia will ramp up production levels and trigger a war for market share at the expense of prices.
Sunway University Business School economist Prof Dr Yeah Kim Leng said the bearish development in the energy market adds to the political and policy factors weighing negatively on the ringgit.
“The failure of OPEC+ countries to agree on production cuts suggest the oversupply situation will likely cause world oil prices to slide further. While the influence of oil prices on the ringgit has diminished due to the country’s diversified exports, it nevertheless continues to be a factor contributing to its volatility given its sizeable proportion of total exports,” he said.
The severity of the impact of Covid-19, and its effects on China and the global economy will continue to exert a strong influence on the ringgit direction, he added.
An early or V-shaped recovery in China will be ringgit positive as Malaysia’s current account surplus will strengthen further with stronger exports, he said.
On the negative side, Yeah noted that should the Chinese recovery fail to materialise, commodity prices, particularly crude oil, are likely to face further downward pressure and pose headwinds to currencies of commodity-exporting countries including Malaysia.
Under the present highly uncertain environment, Yeah opined that the ringgit will continue to fluctuate within a wider expected range of 4.15-4.25 to the US dollar.
“The increased volatility is not necessarily a negative aspect as it is reflective of the efficacy of a flexible exchange rate as a shock absorber. Concerns over excessive volatility are also misplaced as Bank Negara Malaysia (BNM) has the resources and tools to ensure its orderly functioning,” he said.
Last week, BNM slashed its Overnight Policy Rate (OPR) by 25 basis points (bps) for the second time in three months as Malaysia joins global economies in battling the growth slowdown from Covid-19.
The OPR now stands at 2.5%, a level last seen in May 2010. Central bankers around the world are formulating financial countermeasures to address the coronavirus outbreak which has already stuttered global growth.
Following the cut by BNM last Tuesday, the ringgit strengthened against the US dollar, lingering between 4.16 and 4.19 throughout the subsequent days last week as the US Federal Reserve (Fed) cut its policy rate by 50bps to take a more accommodative stance.
The ringgit weakened to hit 4.23 against the greenback two weeks ago, the lowest since October 2017, amid the political development in the country.
Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said the appreciation of ringgit against the US dollar last week was due to the surprise cut in the Fed’s funds rate by 50bps on March 3.
“We saw the US Dollar Index fell to 96 points. However, the ringgit was weaker against the Japanese yen and euro at 3.9597 and 4.7068 respectively.
“Therefore, higher demands for safe-haven currencies are still visible as risk aversion remains the order of the day,” he told The Malaysian Reserve yesterday.
As such, Mohd Afzanizam noted that the recent strength of US dollar-ringgit appears somewhat limited, especially when prospects for OPR cut continue to remain a possible option for BNM in the event of further deterioration in the health of the economy.
“The revelation of BNM’s Annual Report 2019 this month should provide more clarity on the GDP growth projection and the next course of action by BNM.
“As such, dollar-ringgit should linger around 4.20-4.23 in the near term as global uncertainties following concerns on the widespread of Covid-19 outside China would heighten the risk-off mode among the currency players,” he said.
Kenanga Investment Bank Bhd (Kenanga Research) said the local unit strengthened last week in an apparent response to BNM and the Federal Open Market Committee interest-rate cuts aimed to bolster the economy from Covid-19 outbreak.
The abrupt US rate cut of 50bps is seen to spur money flow from the US to Asian markets due to anticipation for better returns, consequently weakening the US dollar.
Kenanga Research expects the ringgit to endure market turbulence this week amid evolving political situation and heightened risk of Covid-19 as the number of cases rise significantly.
“Our model suggests that the ringgit may lose ground against the greenback by 0.19%. The technical outlook for this week shifted towards a bullish US dollar trend, with an immediate resistance seen at 4.20, followed by 4.225. A downward bias could emerge, should the pair break below the 4.157 support level,” the investment bank said.