Ringgit hit by fund outflows despite support from higher crude prices

Crude oil price is not the only factor affecting the supply and demand of the ringgit, analyst says

By SHAZNI ONG / Pic TMR

THE ringgit’s exchange value remains clouded by domestic political risk factors and increased US-China trade tension, outweighing support from higher crude oil prices as fuel demand improves, analysts observed.

Despite stronger crude oil prices, the ringgit was held hostage to foreign outflows that find their way into less risky and better pockets of opportunities around the globe as many economies reopen from movement restrictions imposed to combat the Covid-19 pandemic.

“The ringgit once again finds itself relegated to catch up duty when the Malaysian economy emerges from the Movement Control Order. With oil prices firmer, the ringgit should not weaken much further, benefitting from the increase in petrodollars per barrel as oil markets rebalance quickly,” AxiCorp Financial Services Pte Ltd global chief market strategist Stephen Innes said in a note yesterday.

The ringgit closed 170 points lower at 4.351 against the dollar yesterday.

Independent financial consultant and investment analyst Leong Hoe Kit said the ringgit has been holding out pretty well between the 4.3 and 4.4 range in the last one month.

He said there are many other factors affecting the supply and demand a of the ringgit aside from just the price of crude oil, such as the trade balance of payments for other non-oil products, inflation, interest rate, political stability and currency speculation, among others.

“The Brent crude oil futures contract has climbed back up to the US$35 (RM152.25) per barrel level from its recent lows, but it is still a far way below the US$50 per barrel level about three months ago,” he told The Malaysian Reserve (TMR) yesterday.

Leong noted that the government’s stimulus measures aim to supply cheap money with lower interest rates and various stimulus packages will directly affect the valuation of the ringgit.

“The movement in oil prices should have some bearing on the ringgit, but the magnitude of movement between the two will not be the same. We must also remember the ringgit is not a total free-float, but a somewhat managed float. I think the ringgit will still trade within the 4.3-4.4 band against the greenback next week,” he said.

Meanwhile, Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said the ringgit continues to remain volatile thus far.

The reopening of the economy and forthcoming development over vaccines appear to have boosted optimism of a global economic recovery in the second half of the year (2H20).

“Market sentiments have become more receptive to risk, leading to the appreciation of risky assets such as equities’ and emerging markets’ foreign-exchange rate,” he told TMR yesterday.

The International Energy Agency (IEA) has revised its 2020 global oil demand forecast in its Oil Market Report for May issue.

Previously, the IEA projected global oil demand to decline by 9.3 million barrels per day (mbpd), but revised it to 8.6mbpd decline, suggesting demand contraction could be milder.

“Should oil demand really pick up in the 2H, the US dollar/ringgit would also likely appreciate. Our year-end target for ringgit against the greenback stands at 4.3,” he said.

Kenanga Investment Bank Bhd, in a note on Monday, stated that the ringgit depreciated against the US dollar on US Federal Reserve’s dismissal of negative interest rates, US President Donald Trump’s threat to cut off ties with China and continued plunge in China retail sales data.

“The fall was cushioned by further improvement in Brent crude oil price and a better than expected 1Q GDP for the local economy,” the firm said.