Ringgit at risk from weak crude oil prices

A weakening domestic outlook could also undermine the local currency


THE ringgit will continue to struggle against major units as the country grapples with tumbling energy prices and a slowing economy, warned analysts.

The local unit closed at 4.36 against the greenback yesterday after falling to RM4.40 in intraday trade as commodity-sensitive currencies like the Rouble, Mexican Peso and Brazilian Real and the South African Rand faced a similar fate.

AxiCorp Financial Services Pte Ltd global chief market strategist Stephen Innes believes a weakening domestic outlook could also undermine the local currency.

“The outsized focus on the front month (trading of the West Texas Intermediate (WTI) futures contract on the CME Group’s website) and is a problem as that is providing very poor optics but I think there may be some light at the end of the tunnel when Asia’s large importers start to rev up economic engines,” he told The Malaysian Reserve.

After falling below the zero value level, the WTI crude oil futures contract for May delivery matured (closed) at US$10 (RM43.70) a barrel on Tuesday but the June delivery contract has halved in value in the past two trading days, indicating the market remains concerned with excess supply and weak demand fundamentals.

Hence, Innes believes the ringgit exchange rate could struggle until oil prices stabilise.

“Oil prices remain the focus for financial markets because oil is one market that governments and central banks have no answer for as a sudden drop in demand and continuing supply glut is wreaking havoc across the complex,” he added.

As at press time, Brent futures for June delivery was trading unchanged at US$19 a barrel. It is down some 6% from the US$66 a barrel level at the beginning of the year.

As Malaysia is a net exporter of energy products, crude oil price movements exert a significant influence on the strength of the ringgit.

For every US$1 per barrel drop in the oil price, oil revenue will be reduced by RM300 million according to government officials.

Compared to other major baskets of currencies, the local note is also trading lower.

It fell against the Singapore dollar to 3.0701 from 3.0671 and to 5.4139 from 5.3936 against the sterling. Against the yen, it eased to 4.0843 from 4.0727.

Vis-a-vis the euro, the local note slipped to 4.7730 from 4.7653 previously.

Innes expects the ringgit to weaken toward 4.45 against the US dollar over the near term without a significant OPEC policy response and until Asia’s economic engines kick into gear.

“For the ringgit, the song remains the same, absent a bounce in oil prices, and with the organic stabilising effect of petrodollar inflows missing, the ringgit continues to struggle.

“This is getting compounded by a somewhat resilient US dollar as global risk appetite wanes,” Innes added.

OANDA senior market analyst for Asia Pacific Jeffrey Halley said the Brent contract should find technical support at current levels and a move through US$16 a barrel level will re-open calls for a test of the late 1998 lows around US$10 a barrel, which is the only meaningful technical support that can see from here.

“Asian currencies have proved surprisingly resilient this week. Resource proxies like the ringgit and Indonesian rupiah eased only slightly against the dollar.

“That same story is repeated elsewhere with US dollar/yen unchanged for the week, and the won and yuan only modestly weaker. The fall in oil prices, while a burden for producing countries, is a boon for importing countries,” he said.

As Asia is the world’s largest importer, and the fall in crude oil pricing is acting as a natural support for regional currencies, Halley added.