Ringgit braces for higher US yields, weaker oil prices

By RAHIMI YUNUS / Pic BLOOMBERG

THE ringgit is expected to face some selling pressure in the short term induced by higher US bond yields and softening oil demand, but the longer-term outlook remains stable.

Oanda Corp senior market analyst for Asia Pacific Jeffrey Halley said the local currency is much more vulnerable to gyrations in US bond yields and the resulting moves in the greenback than it is to oil prices at the moment.

He said although oil prices collapsed overnight last week, the ringgit has not had a strong correlation to them on an intraday basis in recent times.

“The oil price was driven by speculative positions being chopped out en masse, and does not reflect the underlying fundamental outlook for oil, which is positive as the global economy recovers.

“Similarly, fears that OPEC+ will suddenly increase supplies massively are overblown. That is not in OPEC+’s interest,” Halley told The Malaysian Reserve (TMR).

He said the fall in oil is likely to be short-lived as futures markets in backwardation imply that physical supplies remain tight.

The analyst further said that will be supportive of the local unit in the near to medium term, and ensure that any US bond market reactions are not felt as keenly by the ringgit.

He added that the US dollar is expected to continue strengthening to 4.1500, possibly 4.1600 against the ringgit this week though a wholesale sell-off in the local currency is unlikely.

Last Thursday, oil prices tanked 7% on stronger US dollar as US bond yields spiked, causing emerging markets as a whole to retreat.

The sharp rise in the US dollar after the Federal Reserve’s decision to keep rates near zero through 2023 had triggered the oil sell-off.

AxiCorp Financial Services Pte Ltd chief global market strategist Stephen Innes said Asian foreign exchange never responds well to higher US yields where local traders are buying the dollar dip mode.

Despite short-lived positive mood changers like last week’s Federal Open Market Committee meeting, he said the medium-term thinking around higher US yields is holding local currency bulls at bay.

He added that the absence of fundamental news on the energy front hinted at broader risk reduction taking place and weighing on the broader energy sector stocks.

“The combination of higher US yields and softer oil prices could be a toxic combination for the ringgit heading into the second quarter,” Innes told TMR.

He said the oil market is expected to experience a bit of reality check on the back of OPEC+ production cuts — or rather the agreement to hold production steady in April instead of ramping it up as the market had anticipated.