Oil price slide sparks selling in emerging market currencies, including ringgit

Downtrend: A Malaysian Petronas oil refinery in Trengganu, (Filepic). Crude oil has started to slide again in July, with the WTI dropping 24 cents further to us$47.15 a barrel yesterday.

KUALA LUMPUR: Concerns on crude oil oversupply, which led the West Texas Intermediate (WTI) crude to breach below the key US$50 a barrel mark, has prompted selling momentum in currencies of emerging economies linked to crude exports, including the ringgit.

“WTI continues to get crushed and so does emerging currencies like the ringgit.

“Investor sentiment is continually plagued by oversupply concerns and the next crucial level to watch (for WTI) is US$42,” said ForexTime Ltd chief market analyst Jameel Ahmad.

Crude oil has started to slide again in July, with the WTI – a grade of crude oil used as a benchmark in oil pricing – dropping 24 cents further to US$47.15 a barrel yesterday.

Meanwhile, another benchmark, Brent crude, fell 47 cents to US$53 a barrel.

“The downside pressure in WTI is inspiring selling momentum in other currencies of economies linked to crude exports such as the Canadian dollar, Mexican peso and Russian ruble,” Jameel told Bernama.

He said the problem that the emerging markets was facing now was that the resumption of selling in WTI was happening at the exact same time as the appetite for the US dollar was picking up with the Federal Reserve (Fed) interest rate rise expected in the next couple of months.

“It is the emerging market currencies that are going to feel the most pain over the selling pressure in WTI and it is happening at the exact same time that the US dollar momentum is picking up speed, a deadly combination that leads to the emerging market currencies declining at a rapid rate as that happened in early 2015,” he said.

Asked if the reshuffle of Malaysia’s Cabinet yesterday had affected the market, Jameel said it could encourage uncertainties in the market but currently, the external factors weighs more on investor sentiment with regards to the ringgit.

In addition to the black gold and Fed’s normalisation factors, Jameel highlighted that the uncertainty over the health of the Chinese economy added to the recent investors’ negativity.

“Declining economic momentum is continuing to be the running theme of the Chinese economic story in 2015 and with China being among the largest importers of crude, the country’s slowing growth would lead to less demand for WTI.

“It is a global phenomenon ... not just Malaysia is impacted,” he said.

Besides the pressure from the Fed’s interest rate outlook, the ringgit and other emerging currencies were vulnerable to further losses if the WTI hit below US$42 a barrel, said Jameel.

Asked how the losses could be limited, he said the situation could only improve if the Fed leave its monetary policy unchanged and when the prices of the commodity had stabilised.

The ringgit was quoted at 3.8130/8150 against the US dollar at 5pm yesterday, slightly higher from 3.8140/8160 recorded on Monday. — Bernama