Ringgit gains ground, but risks remain

  • Forex Premium
  • Saturday, 18 Jan 2020

A laggard last year, the ringgit now appears to be playing catch-up with its regional peers.

Two weeks into 2020, the ringgit has gained 0.7% against the US dollar.

This puts it as the second-best performing currency in Asean, after the Indonesian rupiah, which has gained 1.5% against the greenback since the start of the year.

Conversely, the Thai baht – the top-performing currency in the region last year – has lost 1.5% against the US dollar, while the Philippine peso has weakened a marginal 0.4% against the greenback.

The Singapore dollar, which is pegged to a mainly US dollar weighted basket of currencies, on the other, has remained relatively unchanged since the beginning of the year.

As of Thursday, the ringgit was quoted at 4.06 against the US dollar.

This compared with the average US-dollar-to-ringgit exchange rate of 4.14 for 2019.

Overall, the local note gained 1.1% against the greenback last year, after losing 2.8% in 2018.

According to economists, the ringgit rally in recent weeks has been mainly driven by continued foreign inflows into the Malaysian bond market, the strengthening of the Chinese yuan, as US-China trade tensions ebb and firmer crude oil prices.

That the US dollar has somewhat weakened over the last one month has also helped lift the ringgit.

As it stands, most projections are for the ringgit to continue gaining ground against the US dollar this year, as the outlook for emerging market in general improve, particularly with the recent signing of the first phase of the US-China trade deal.

But there is still a long way to go before the local note could strengthen below the psychological-mark of 4.00 against the US dollar.

Latest projections

Standard Chartered, for one, expects the ringgit to trade between 4.00 and 4.10 against the greenback this year.

According to the bank’s head of Asean and South Asia FX research, Divya Devesh, the ringgit is expected to strengthen in 2020 along with the currencies of other emerging economies, as the outlook has turned increasingly bearish on the greenback due to the US twin deficits and its upcoming presidential election.

In addition, he notes the expected monetary policy easing by the US Federal Reserve and the European Central Bank could provide support for emerging-market assets, including that of Malaysia.

Devesh is of the view that the ringgit has been undervalued for years despite Malaysia’s strong economic fundamentals.

He argues that the improvement in the country’s external balances over the past four years will eventually be reflected on the performance of the ringgit.

Meanwhile, AmBank Group chief economist Anthony Dass in a recent note says a weaker US dollar, stronger yuan, favourable domestic macro fundamentals, firm oil prices plus positive benefits from capital flows into the region point to a more favourable ringgit outlook.

His bull-case scenario is for the ringgit to reach 4.00 against the US dollar by end-2020, while a bear-case scenario would be for the local note to touch 4.18 against the greenback by end-2020.

“A play on the ringgit will be driven by several events such as the FTSE Russell retaining Malaysia in the World Government Bond Index during its next half-yearly review in March 2020, (revision in Malaysia’s credit score by) global rating agencies, the US Fed ending the easing rate cycle thus providing room for Bank Negara to institute a cut in the overnight policy rate; (domestic) political transition; and geopolitical tensions, ” Dass explains.

Separately, RHB Research expects the ringgit to strengthen further towards 4.00 versus the US dollar by end-2020, despite negative headwinds and near-term volatility.

According to the brokerage’s economist Ahmad Nazmi Idrus, the positive development coming from the US-China Phase One deal and relative attractiveness of Malaysian assets will likely favour the currency’s appreciation.

“In addition, the weakness in US economic growth – as support from the corporate tax cut lapses – will likely cause the US Fed to ease rates further, thus weakening the US dollar, ” he explains in a recent report.

Also positive on the ringgit outlook is OCBC Bank, which expects the local note to strengthen to 4.04 against the greenback by end-2020.

Positive factors

In general, foreign inflows into Malaysia’s debt market are expected to continue into 2020, thanks to the global accommodative monetary stance and the recent signing of the US-China phase one deal, which has boosted investor sentiment.

Last year, Malaysia enjoyed net foreign inflows of RM19.9bil into its bond market, which offset the total foreign net selling of RM11.2bil in Malaysian equities.

This was a reversal from the total net selling of RM21.9bil in Malaysian bonds by foreigners, and RM11.9bil in Malaysian equities, in 2018.

Meanwhile, a stronger yuan also bodes well for the ringgit, which closely tracks the underlying movement of the currency.

The yuan recently rose to its highest level in more than five months, after the United States removed China from the currency manipulator list.

On the future direction of the yuan, China has also said it would keep its monetary policy and currency “steady” despite “complex external pressure”.

Speaking to Bloomberg, Jimond Wong, senior fixed-income portfolio manager at Manulife Investment Management in Hong Kong, says the tempering of the depreciation expectations for the yuan made it an anchor in the region.

“That gave us more comfort to overweight some of the higher-yielding currencies, such as the rupiah and ringgit, ” he explains.

Also expected to support the ringgit, crude oil prices are expected to remain firm, with the international benchmark Brent prices expected to trade above the US$60 per barrel level through 2020.

In addition to these factors, the ringgit is also expected to be supported by the US Fed’s dovish bias and Malaysia’s favourable bond yield differential with the US, and the country’s sustained current account surplus as well as continued inflow of foreign direct investments.

Mixed performance

Year-to-date, the ringgit has also gained ground against major developed currencies such as the euro (1.4%), British pound (2.1%), Japanese yen (1.9%) and Australian dollar (2.5%). In 2019, the ringgit also strengthened against the euro (3.3%) and Australian dollar (1.5%), but it weakened against the British pound (2.9%) and traded unchanged against the Japanese yen.

Against the yuan, the ringgit has lost 0.6% year to date, after having strengthened 2.3% against the Chinese currency in 2019.

Within Asean, the ringgit continues to slide against the rupiah, losing 0.8% year to date, after having weakened 2.6% against the Indonesian currency last year.

But the ringgit managed to recover some lost ground against the Singapore dollar, baht and the Philippine peso year to date, gaining 0.7%, 2.2% and 1.0%, respectively.

Last year, the Malaysian note saw depreciation of 0.2% against the Singapore dollar, about 7% against the bath and 2.7% against the peso.

A longer past trend show the ringgit has lost considerable ground to its regional peers over the years, as these economies continue to make faster progress than Malaysia.

Hence, many believe the future direction of the ringgit will largely hinge on the Government’s action to move Malaysia up the value chain.

In the longer term, unless the Government execute workable policy solutions to reform Malaysia’s economy into one that is truly competitive, productive, efficient and technologically adept, the country will face the risk of falling behind its regional competitors that have been aggressively reforming their economies to spur sustainable growth.

And this will eventually be reflected in the value of the ringgit, and where it stands, not just against the currencies of major economies, but also that of its regional peers.

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