Ringgit on the rise, weaker US$ and commodity prices help

Alliance Research chief economist Manokaran Mottain said the 2016 fiscal deficit target of 3.1% could be hard to achieve if the oil price remains low.

PETALING JAYA: The ringgit’s spurt against the US dollar has been a function of dollar weakness but economic reasons closer to home have seen the ringgit push on against the greenback since the second quarter of this year.

Economists do welcome the improving ringgit, which had appreciated from RM4.42 to the dollar since the start of the second quarter to RM4.19 last week, and are keeping an eye on how the stronger ringgit impacts external trade.

The ringgit has benefitted from higher commodity prices and higher global trade.

“The trade surplus, which has been narrowing in recent years, has improved but the fluctuation in the currency might be the new normal,” said AllianceDBS Research chief economist Manokaran Mottain.

The ringgit’s weakness against the dollar has been a benefit to the country’s external trade in the first half of the year with the trade surplus widening as a result.

It was reported that between January and July of this year, exports grew 22.3% from a year ago to RM529.68bil, while imports rose 23% to RM478.71bil.

This resulted in a trade surplus of RM50.97bil.

Total exports were up 21% during the first half and exports were 23.3% higher during the first half of the year compared with the same period last year.

But with the US Federal Reserve now ready to start scaling down the vast amount of debt it acquired since the global financial crisis in 2008 and slated to increase US interest rates into next year, analysts said that dual move could impact the dollar against other currencies.

With the dollar gaining a short lift after the US Federal Reserve’s meeting last week, markets will be watching to see how the action of the US Fed translates into the dollar movement, which has been trending down against a basket of major currencies since the start of the year.

As for the ringgit’s performance, Hong Leong Investment Bank in a report said that the ringgit strengthened in the second quarter due to a lack of government bonds maturing.

The stronger exports also helped in the ringgit’s showing against the dollar.

“We opine that export proceeds has surged recently riding on strong export growth and higher trade surplus (Jan-Jul 2017: RM51bil; Jan-Jul 2016: RM43.7bil).

“Consequently, Bank Negara’s reserves have climbed back above US$100bil despite a stable US dollar swap position at US$16.5bil as at July 2017,” it said.

It said rising oil prices over the past few months have benefited the ringgit, which in the past has moved in parallel with oil prices against the US dollar. The price of Brent crude oil was US$56.86 a barrel after climbing from under US$45 a barrel in June.

Low foreign holdings in upcoming maturities in the bond market have been to the benefit of the ringgit. The report said that despite the sizeable government bond maturities in September to October (RM14bil and RM13.5bil respectively), foreign holdings of bonds were low (5.8% and 4.3% of total outstanding) as most outflows already occurred in the first quarter of this year.