KUALA LUMPUR: The ringgit led the rally of Asian currrencies improving against the US dollar as it gained 1.86% yesterday.
The ringgit surged to RM4.0985 in the morning session, or close to a two-month high against the greenback. It pared back some gains and was last traded at RM4.12 as at 5pm yesterday. Since hitting a 17-year low of RM4.45 on Sept 29, the ringgit has strengthened by nearly 10%.
Most Asian currencies also strengthened against the US dollar. After the ringgit, the Korean won and the rupiah were the best-performing currencies against the greenback, gaining 1.48% each. The ringgit improved despite the oil price falling – breaking the correlation between the two.
One of the reasons for the decline in the ringgit since late last year is attributed to the low oil and gas prices, as Malaysia is a net exporter of the commodity. Yesterday, Brent crude fell to less than US$49 per barrel.
In tandem with the strengthening of the ringgit, the FTSE Bursa Malaysia KL Composite Index also continued to rise, having gained 6.8% since Sept 29. The index closed at 1,713.25 points yesterday, continuing a streak of seven consecutive days of gains.
The dollar has weakened against emerging market currencies due to the possibility of the US Federal Reserve postponing its interest rate hike to next year. This is contrary to earlier expectations that the Fed would start raising rates by this month or latest in the final quarter this year – the first since the financial crisis of 2008.
Worse-than-expected retail sales and inflation data this week reignited concerns over a US economic recovery, while the Monetary Authority of Singapore’s (MAS) easing of its monetary policy on Wednesday also contributed to the ringgit’s advance, said AmBank Group chief currency and fixed-income strategist Wong Chee Seng.
“We have seen an overall shift in sentiment in emerging markets, with more capital inflows coming into Malaysia recently. The ringgit has become more appealing as it remains critically undervalued,” said Wong, adding that the currency would be fairly valued at between RM3.70 and RM3.80 to the dollar.
The economic slowdown in China, coupled with weak US inflation, strongly indicates that central banks globally are keen to maintain a loose monetary policy to spur growth.
Apart from MAS’ decision to adjust its currency band, the Indonesian central bank is expected to maintain its benchmark interest rate of 7.5% on Thursday.
Bank Negara is widely expected to maintain its overnight policy rate of 3.25% in its next monetary policy announcement on Nov 5.
In an Oct 15 note, Standard Chartered pointed out that the recent rally in Asian stocks coincided with strong foreign capital inflows. Some US$27bil was pulled out of seven key Asian markets from June to September this year.
This trend was reversed by the weak September US payrolls report on Oct 2, which pushed back expectations of the Fed raising rates soon. Members of the Federal Open Market Committee voted to hold rates steady on Sept 17, citing weak inflation expectations.
“The seven key markets – Thailand, the Philippines, Malaysia, Taiwan, Indonesia, India and South Korea – have received US$2.3bil of inflows since the payrolls report. From these countries, Malaysia has the strongest relationship between equity flows and foreign exchange returns,” Standard Chartered said.
Foreign fund managers seem to have turned bullish on Malaysian equities. In an interview with Bloomberg, Franklin Templeton Investments chairman Mark Mobius pointed out that the ringgit’s plunge had made Malaysian stocks an attractive investment proposition.
On a price-to-parity basis, the ringgit was very undervalued with the likelihood of a recovery far greater than a decline, Mobius said. He described the ringgit as a “bombed out” currency and did not think it could go down any further.
The ringgit had been pegged at RM3.80 to the US dollar between 1998 and 2005. Since 2005, Bank Negara has eased the restrictions, but the ringgit only started to appreciate against the US dollar in 2009 when the quantitative easing started. It went as low as 2.99 against the dollar in March 2013.