PETALING JAYA: The ringgit bounced back to cross 4.25 against the greenback yesterday, marking a confidence factor for markets and likely to strengthen further in the coming weeks, according to currency strategists.
Independent interest rate and foreign exchange strategist Dr Suresh Ramanathan said the stimulus measures launched by the Finance Ministry to support the local stock market earlier this week were among the factors for the ringgit to reverse.
The ringgit had slid beyond four to the dollar for the first time since 1998 on Aug 12, amid a slowing economy and political risks linked to Prime Minister Datuk Seri Najib Tun Razak.
The devaluation of the yuan had lumped more pressure on the local note leading to losses in Asia, making the ringgit the worst performer in the past 12 months.
Suresh said the liquidity injection to the equity market was a positive move for markets, limiting the outflow of funds from equities and granting some form of two-way trade flows in the equity market.
“The currency market has taken this positively, although currency markets were scaling back their long dollar positions as early as late last week in light of the Federal Reserve’s Federal Open Market Committee (FOMC) decision this week, so naturally, the ringgit gained,” said Suresh.
While the Fed had a dual mandate of keeping inflation and unemployment low, Suresh said the issue would be whether the Fed was willing to move policy rates in an environment of low inflation and low employment.
“If the Fed raises interest rates, it’s because it’s aware that wage inflation would increase and have repercussions on the broader inflation outlook, and if it doesn’t, it’s purely due to the fact that the economy is still in a fragile condition,” he said.
However, if the Fed stays put, all bets on the ringgit at four or five would be off, and will head towards 3.70 to 3.80 within a matter of weeks.
On the forthcoming budget, which is expected to be expansionary, Suresh said with the target deficit remaining intact, this meant more funds would be pumped in for development expenditure.
The indication of a 3.2% deficit target by the Prime Minister this year should not come as a surprise, since the revenue section of the budget from the new consumption tax (the goods and services tax) had compensated in preserving the target.
Commenting on the spike in the US 10-year treasury yields, he said this was mainly due to a sell-off in the treasury market and a switch towards holding cash.
“It heralds a negative impact for Malaysia’s debt market and not for the ringgit,” he said.
The brent crude oil stabilising was reflective of the consolidation of the greenback, Suresh said, adding that if the dollar consolidates and eases, oil could inch higher due to currency and price factors.
Singapore-based head of foreign-exchange research at Malayan Banking Bhd
, Saktiandi Supaat, also concurred with Suresh, stating that the proactive economic measures taken by the Government spurred positive sentiment.
“Once the external landscape stabilises and the oil price is not on a downward trajectory, the weakness in the ringgit could be constrained,” he said, adding that commodities have seen a bit of turnaround in the last few weeks.
He said the FOMC decision would be the key factor, a move could lead to an initial dollar strength and lead to higher US dollar/ringgit for a short while before stabilising.
If the Fed doesn’t raise rates, Saktiandi said it would be a breather for the US dollar/ringgit momentum upwards and could see the pair go back towards 4.00.
On the US 10-year treasury yields, he felt that the spike may not move significantly higher towards 2.5%, and if the Fed hiked rates, the dollar strength was likely with the US dollar/Asia moving higher.
The movement of the brent crude oil was likely to be supply-side driven, due to lower US shale production, he said, adding that this could support the ringgit.
The ringgit weakened to a new 17-year low against the US dollar and also breached the 3.00 level against the Singapore dollar three weeks ago.
It was reported that the measures called by Najib to address issues faced by the Malaysian economy were to support the stock market rather than as a catalyst to bolster the local economy.
Topping the list of measures is an RM20bil allocation to ValueCap, which was set up in 2002 to support underperforming shares.
According to a Reuters report yesterday, oil rose after an unexpected drawdown in US stockpiles and an increase in US gasoline prices, but concerns remained about a global surplus, falling Asian demand and whether the Fed would raise interest rates.
US crude futures strengthened after the American Petroleum Institute reported a 3.1-million-barrel drop in crude inventories last week, versus analyst expectations of an increase.
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