KUALA LUMPUR: The intense slide in the ringgit over the past three weeks will look for direction from the performance of the US light crude oil (West texas Intermediate), says international forex broker FXTM.
Its chief market analyst Jameel Ahmad said on Tuesday the ringgit has fallen in line with a sell-off in Malaysian stocks, and has been “aggressively punished” due to investor sentiment owed to the US interest rate outlook, resumed selling in commodities, and increased risks in China, among others.
“The question over whether Bank Negara should step in to defend the Malaysian currency or whether a peg should be installed will now be actively asked mainly because the decline in the ringgit over the previous three weeks has been extremely intense.
“The USD-MYR has exploded from an already highly-valued 3.80 towards 4.1370 and due to the increased possibility that WTI (West Texas Intermediate crude oil) is looking vulnerable to falling below US$41, matters could get even worse,” he said.
At midday, WTI was down 10 cents to US$41.77. The ringgit weakened to 4.1202 to the US dollar,
Jameel added that the most supportive factor for the ringgit and other emerging market currencies would be a rebound in the price of WTI. If WTI extends below US$41, there would be further losses in these currencies.
On a larger perspective, he also said emerging markets could suffer a further downturn in exports due to China’s devaluation of the Yuan, amid the aggressive selling in commodity markets.
He said this could mean further currency weakness throughout the second half of the year.
“This would also mean that central banks are powerless to watching their currencies continue to decline if the selling in commodities continues, mainly because this would naturally further weaken the currencies of these markets,” he said.
He added that emerging markets have suffered the most because they were hit not only because exporting to China became more expensive, but also because there is a need to adapt being less-reliant on trading with China.
“The China economy is in a complete transition stage where it is attempting to move away from importing goods and focusing on domestic growth. By devaluing the currency they have not just enhanced export competitiveness, but also improved inflation expectations because a weaker currency is inflationary in itself while also inspiring consumers to look more for domestic products,” said Jameel Ahmad.
Gold has benefited the most from the situation in China, having jumped close to US$30 over the past two days. At midday, it was up US$1.33 to US$1,119.03.
While all eyes are on how this would impact the Federal Reserve’s move to begin raising US interest rates, if it does, that would provide room for the Gold bulls to continue recovering its losses over the past few months.
Jameel however, does not believe that this move from China should impact the Federal Reserve to when it begins raising US interest rates.
He said that the US economic data is consistently robust and raising optimism that the economic recovery is sustainable, which is reason enough for them to carry out their pledge to begin raising interest rates in 2015.
“However, a previous FOMC (Federal Open Market Committee) statement did highlight that the central bank were monitoring international risks and with the recent developments in China and resumed selling in commodities widening the woes for the emerging markets, these international risks are growing,” he said.
