This article first appeared in The Edge Malaysia Weekly on March 25, 2019 - March 31, 2019
INVESTORS appear to have adopted a risk-off approach to the ringgit amid uncertainties surrounding the global economy, with the now long-running US-China trade war and Brexit topping the list, according to economists.
The resolution of trade tensions between the two largest economies in the world has been illusory to date, with US President Donald Trump — or “The Tariff Man” as he likes to refer to himself — recently warning that his country may leave tariffs on China goods for a substantial period of time to ensure the Chinese comply with future trade agreements.
Over in the UK, although the European Union agreed to postpone Brexit past the March 29 deadline, Prime Minister Theresa May has yet to gain parliamentary support for her withdrawal deal.
Compared with a year ago, these uncertainties seem to be weighing more on Malaysia and the ringgit as the local unit’s performance lags behind its regional counterparts.
Over the span of one year, the ringgit has depreciated by 3.35% against the US dollar. In comparison, the Philippine peso has slipped 1.15%, the dong 1.87%, Singapore dollar 2.71%, and rupiah 2.66%. Surprisingly, the baht’s decline, too, has been minimal, depreciating 1.41% against the greenback.
Socio-Economic Research Centre executive director Lee Heng Guie attributes the baht’s strength to strong foreign direct investments, a large current account surplus and subdued inflation amid an upcoming general election, its first since the 2014 military coup.
“The prospect of another interest rate increase by the Thai central bank in the second half of the year, on the back of the [US] Fed’s dovishness, will help boost the baht,” Lee says.
As for the ringgit, he is of the view that its decline against its peers is due partly to the net selling of ringgit-denominated assets.
“Year to date, Malaysia’s stock market, as benchmarked by the FBM KLCI, was down 1.6% in contrast to the Stock Exchange of Thailand, which was up 4.48% and the Jakarta Composite Index which was up 4.96%.
“Foreigners turned net sellers of Malaysian equities [selling RM800 million worth] in February, following RM1 billion in net buying in January,” he tells The Edge.
FXTM global head of currency strategy and market research Jameel Ahmad is of the opinion that the Malaysian currency does not follow domestic economic conditions, and is “mostly influenced by global economic conditions, specifically investor appetite towards investing in emerging markets”.
However, Lee maintains that domestic factors do matter. While the Malaysian government has taken measures to rebuild the country’s fiscal position — in particular plans to reduce the fiscal deficit within three years and remove (a certain degree of) policy uncertainty post the historic May 9, 2018, election —investors, especially foreigners, remain wary about the domestic landscape.
“[Given that we are faced ] with considerable external challenges and uncertainties, the policy priority [should be] to weed out excessive volatility in the ringgit to create a stable value while continuing to strengthen the dynamics that support the strong fundamental value of the ringgit over time.
“It is the strong economy and confidence [in it] that is reflected through the currency. In times of external uncertainties, we should not be overly fixated on the level of the ringgit against the US dollar, rather, we should look at the ringgit’s strength against a basket of trade-weighted currencies to ensure that it is not significantly misaligned to its major trading partners,” Lee says.
At press time, the ringgit was 4.0580 to the US dollar and economists and currency analysts concur with the view that the ringgit will not weaken further from its current levels.
Maybank Investment Bank Research chief economist Suhaimi Ilias, for one, is projecting the ringgit to trade relatively stable against the US dollar this year.
“Our FX research team expects the ringgit to trade at 4.06 to the dollar by the end of this year. The relative stability of the ringgit this year, compared to the last when the currency was going through a bout of weakness, is supported partly by the movement in crude oil prices.
“Crude oil prices had plunged in the fourth quarter of last year, from around US$80 per barrel in October to slightly below US$50 per barrel around Christmas. And we then saw the ringgit weaken to around 4.20 to 4.25 against the dollar.Now we have a situation where crude oil prices have essentially improved,” he observes.
Taking a YTD view, Jameel points out that the ringgit has performed better than the Singapore dollar and Philippine peso while remaining on a par with the rupiah’s performance.
“The ringgit remains exposed to global factors that are beyond its control, but can still find support from Malaysia’s consistent economic fundamentals. We do look forward to the potential for the ringgit to gradually increase its valuation from here. The most recent message from the US Federal Reserve that it will not be raising US interest rates anytime soon is very good news for the short and medium-term outlook for emerging markets.
“Global funds are also waiting for major overhangs — such as a US-China trade deal that would lift tariffs and a concrete resolution to Brexit to be lifted — before possibly ramping up exposure to emerging-market assets. This confluence of risk-on events may serve to push USD/RM closer to the psychologically important 4.0 level as the year progresses,” Jameel says.
Will the US dollar gain legs?
Not quite, opines Gao Qi, a currency strategist at Scotiabank in Singapore. “We expect the US Dollar Spot Index (DXY) to slide towards 95 going forward given the Fed’s dovish stance and its plan to end balance sheet reduction at the end of September 2019.”
At the time of writing the DXY was 96.62, up 0.52% YTD.
OANDA senior market analyst Jeffrey Halley thinks it is too soon to say where the US dollar is headed. “In the shorter term, the dollar may fall further post a dovish Fed. Come the second half of 2019 however, I expect safe-haven flows and higher US rates compared with their peers that will see the dollar strengthen.”
FXTM’s Jameel says the ringgit is in a position to be aided by a softer US dollar after the Fed maintained its “patient” stance on interest rates. “Should oil prices climb higher on the back of Opec+’s attempts to rebalance the global markets, that is going to help support the ringgit.”
Jameel says the revised estimate of the US’ fourth-quarter gross domestic product scheduled for Thursday will also be keenly watched by investors, along with other US economic announcements.
“If the revised GDP print, along with other US economic indicators, justify the Fed’s forecast patience on interest rates, this could add more downward pressure on the dollar,” he says.
As for the ringgit, any further upside would also depend on the monetary policy stance of Bank Negara Malaysia. At the last monetary policy committee meeting, the central bank left the overnight policy rate (OPR) unchanged at 3.25%.
In a note last Friday, UOB Malaysia senior economist Julia Goh says the Fed’s ultra dovish tone lends more flexibility to Bank Negara to consider easing rates in view of the external headwinds and weaker domestic sentiment.
“We are penciling in a 25-basis-point cut in the OPR to 3% this year,” she says, noting that the Consumer Price Index (CPI) fell in February by 0.4% year on year — the second straight dip this year — from 0.7% in January. The 0.4% slide was slightly below consensus expectations of a 0.3% decline.
“We expect headline inflation to revert back up once the high base effect in the transport component recedes and the targeted fuel mechanism is introduced in the second half of the year. Given the low readings of -0.5% in headline CPI for January and February, we are tweaking our full-year estimate for average inflation to 1.5% (from 2% previously) for 2019,” she says.
Bank Negara governor Datuk Nor Shamsiah Mohd Yunus does not see disinflation risks for Malaysia as there have not been any triggers. “Going forward, we expect inflation to average moderately higher this year, core inflation will remain stable, and we do not see any disinflation risks in the economy,” the governor said last month.
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