KUALA LUMPUR (July 12): The ringgit climbed to its highest in six months against the greenback, and was the best performing major Asian currency on Friday, as easing US inflation bolstered the case for Federal Reserve (Fed) rate cuts.
The local currency climbed to as high as 4.6630 against the US dollar, and was last at 4.6720 at 9.30am. The Chinese yuan and Indonesian rupiah also gained, while the Japanese yen, South Korean won, and Thai baht depreciated against the dollar.
Fundamentals are getting better for the ringgit, amid early signs of broad-based improvement in Malaysia’s balance of payment, Australia and New Zealand Banking Group (ANZ) said.
“Firstly, we expect the goods trade surplus to rise in a sustainable manner,” the bank said. “Secondly, we anticipate a narrowing of the deficit on the financial account, owing to higher net foreign direct investment flows.”
Overall, there would be greater stability for the Malaysian currency, even as it remains unclear if its appreciation is sustainable, ANZ added.
The 10-year US Treasury yield fell following a slide in the consumer price index in June from the prior month, according to the Labor Department, pushing the annualised rate to its lowest in more than three years at 3%. Bond yields and prices move inversely.
Lower yields typically boost risk-taking and encourage fund flows to emerging markets in search of higher returns. Malaysia’s stock market has also gained, with the benchmark FBM KLCI gaining some 11% year-to-date, thanks partly to foreign inflows.
Consecutive below-consensus US inflation readings “strengthen our argument for a September rate cut”, said Kenanga Investment Bank, noting that the market is currently pricing in an 84.6% probability of a cut by the Fed, compared with 46.8% a month ago.
Malaysia’s “solid” industrial production data on Friday and “strong” second-quarter preliminary gross domestic product estimate may bolster the case for improving the country's economic prospects, Kenanga said. That may help send the ringgit towards 4.65 against the US dollar, the house added.
The ringgit strengthened more than 2% after hitting its lowest in more than two decades in February. The local currency is still down about 2% against the greenback, tracking depreciation of major Asian currencies, amid broad dollar strength on expectations for fewer rate cuts by the Fed this year.
Earlier this week, JP Morgan upgraded Malaysian equities to ‘neutral’, after almost six years of an ‘underweight’ rating, citing policy reforms, data-centre investments, and a significant infrastructure build-out.