AGAINST the rebound in emerging market (EM) currencies, how far can the ringgit strengthen?
Faced with the risk of slower-than-expected growth and lingering uncertainties over trade tensions, the local currency may trade range bound with the possibility of some strengthening towards the end of the year. Slower growth may necessitate interest rate cuts and lead to capital outflows.
However, continued current account (CA) surplus, a stable foreign reserve position, affirmations of Malaysia’s sovereign rating by major international rating agencies and a weakening dollar will likely hold up the ringgit.
Besides the trend of the dollar, which is weakening based on a currently dovish Federal Reserve, the ringgit will be influenced by Malaysia’s growth prospects and further clarity on the government’s medium term plans to achieve a sustainable revenue stream.
The key factor to watch is the Chinese economy and the stability of the yuan as the authorities navigate challenging macro conditions.
China’s economy is slowing quite rapidly, from a trade war with the US and corporate debt de-leveraging, a situation that leads to slower imports of raw materials.
To combat this slowdown, China is using drip-feed, focused stimulus that would not have such a big impact on the world as previous fiscal stimulus programmes.
China’s shift into consumption, unlike its previous emphasis on manufacturing and housing, may also lead to less imports of raw materials from developing countries.
“The ringgit is expected to trade between RM4.00 to RM4.15 to the dollar for the first half of the year, and between RM3.95 to RM4.00 by the end of December,’’ said Lee Heng Guie, executive director, Socio Economic Research Centre.
With the possible end of the Fed rate hiking cycle and more attractive valuations, EMs may attract foreign inflows which strengthen their currencies.
For now, the possibility of further weakness in the dollar, on a pause in US rate hikes, will further boost EM currencies.Following the dovish pivot by the Fed last week, the rupiah surged through 14,000 to the dollar, a key resistance level, on gains of 1.2% to 13,965 to the dollar.
The baht, which was the region’s best performer last year, has registered the highest gain in the region, jumping 4.2% against the dollar this year.
Thailand’s CA surplus widened to US$5bil last month from US%1.6bil in November, said Bloomberg.
Malaysia may lag the other EMs but “it will have its time,” said Danny Wong, CEO, Areca Capital. Oil price is a factor to watch; in the long run, Malaysia’s CA surplus over some EMs which have twin deficits, and the reformed theme of the new government, will likely attract investors into foreign direct investments and local assets.
The ringgit has been quite resilient against the dollar; despite the drop in Brent crude oil by 35% between early October and end of December last year, it ended almost unchanged.
The recent recovery in oil price to US$61 per barrel by the end of January, has pushed the ringgit up by 2.7% from its weakest level in October, noted Nor Zahidi Alias, chief economist, Malaysian Rating Corporation.
The ringgit may trade just slightly above RM4.00 to the dollar within this year, said Hor Kwok Wai, chief operating officer, global markets, Hong Leong Bank.
However, it may not be a boost all the way for EMs as the dovish pivot by the Fed was prompted by worries over slowing global growth, Brexit troubles, trade frictions, uncertain impact from the partial US shutdown and lower business spending as well as forecasts for corporate profits.
The US consumer confidence survey for January by the Conference Board showed the widest gap between sentiment now and future expectations, since 2001, which was the first month of the US recession then. To billionaire investor Jeffrey Gundlach, that is the “‘most recessionary signal” presently.
Besides pausing in Fed rate hikes, chairman Jerome Powell also indicated it would likely, sooner than previously planned, stop trimming its US$4.1 trillion balance sheet, accumulated through stimulus bond purchases.
Strong job gains for January could not sway the Fed presidents of Dallas, Robert Kaplan and St Louis, James Bullard, from their stand for a pause in rate hikes.
Kaplan pointed to an unexplained rise in part-time jobs; Bullard considers it to be backward looking. Word has it that high paying jobs in the US have suddenly gone scarce. Recession is a top worry.
“The confirmation (of a recession) will be when the yield curve starts to steepen (on falling short term bond yields), as the Fed begins to buy up Treasury bonds, thus cutting rather than raising rates,’’ said Pong Teng Siew, head of research, InterPacific Securities.
Columnist Yap Leng Kuen is watching developments over the next few months.