OPEC+ production cut helps reduce ringgit volatility

The cut removes a significant supply tail risk that was weighing on prices last month


THE OPEC+ production cut will help reduce volatility in the ringgit exchange rate amid the bearish economic outlook for Malaysia.

AxiCorp Financial Services Pte Ltd global chief market strategist Stephen Innes said Malaysia remains a viable destination for bond inflows as investors look for opportunities to redeploy capital in a moderately bearish market due to higher real rates.

“The OPEC+ deal should be viewed as supportive for the ringgit as it removes a significant supply tail risk that was weighing on prices last month.

“The market is far from pricing the 100 basis points of easing that I’m thinking will happen with the extended Movement Control Order (MCO), which should also trigger more demand for Malaysian Government Securities,” he said.

Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said the US dollar to ringgit exchange rate has depreciated quite steeply this year with year-to-date performance down by 5.6%, as the risk-off mode by investors has been the main factor for the depreciation alongside with concern on global economic recession and lower crude oil prices.

“It’s muted because the quantum of the production cut was not signifi- cant. The estimates range from 10-15 million barrels per day (bpd) previously. It turns out to be 9.7 million bpd. Not to mention the expected decline in global oil demand.

“The International Energy Agency has indicated global oil demand would fall by 90,000 bpd in 2020, the first decline since 2009. And last year, more than 80% of global oil demand growth was due to China.

“It appears larger cuts are needed in order to rebalance the crude oil market,” he told The Malaysian Reserve yesterday.

Mohd Afzanizam noted that this was offset by the response from the credit rating agencies which have been quite positive.

“Thus far, Malaysian government sovereign rating has been retained at A3/A- although Fitch Ratings Inc revised their outlook from stable to negative.

“Our government bonds also remain in the World Government Bond Index although still on the watch list,” he said.

In the near term, Mohd Afzanizam opined the ringgit greenback exchange rate will continue to be choppy as the incoming economic data is likely to be weak.

“We are unsure how long lockdowns, partial lockdowns and social distancing measures will continue. These measures will likely have a significant impact on economic activity in the near term,” he said.

The global economy is practically almost at a standstill with a sharp rise in jobless claims in the past three weeks in the US.

“In that sense, foreign-exchange players would want to seek shelter in the safe-haven currencies as the level of uncertainty is enormous. The economic stimulus which has been put in place is also at an unprecedented level,” he said.

Assuming the global authorities would be able to contain the Covid-19 spread, Mohd Afzanizam expects the economic recovery that comes may be very swift.

“In the meantime, the ringgit could linger around RM4.35 before gradually appreciating towards RM4.30 by the end of the year,” he said.

Meanwhile, Kenanga Investment Bank Bhd, in a note yesterday, stated that the ringgit gained last week as Putrajaya announced additional economic stimulus worth RM10 billion for small and medium enterprises.

“The ringgit is set to endure another week of market volatility as the market sees OPEC+ deal to cut production by 10 million bpd in May, and June is insufficient amid low global demand.

“The deal may provide some support to oil prices from further downside, subsequently supporting the stability of the ringgit,” it said.

According to the firm’s technical analysis, the short-term view has cast a weakening bias for the ringgit with strong resistance at RM4.35 and minor support at RM4.29 against the US dollar.

Alternatively, the ringgit may be due for an upswing should the pair break through the RM4.28 support level, provided crude oil price breaches and maintain above the US$40 (RM172.80) per barrel, the firm added.