Medium-term bullish outlook on the ringgit

So long as the yuan softens further and global growth sentiment worsens sharply, the ringgit should be trading at 4.34-4.35 to the dollar, with the next hurdle at 4.38-4.40, if the current driving factors continue, said Malayan Banking Bhd head, foreign exchange research, Saktiandi Supaat.

AGAINST the fall in the ringgit, the medium-term outlook is positive, buoyed by among other factors, strong commodity prices and a healthy current account surplus with strong exports growth.

A benign inflation outlook relative to Asian partners and ample foreign currency reserves should also cushion further declines in the ringgit.

The fall in the ringgit is expected to stop once certain outstanding issues related to aggressive United States interest rate hikes and the weakening of the yuan are addressed.

On a technical basis, the dollar/ringgit exchange rate has already broken 4.34.

As long as the yuan continues on a weaker note, the dollar remains supported and as global growth concerns intensify, the ringgit can weaken against the dollar.

This is despite a supported oil price as there might be a slight lag in the raising of policy rates domestically.

However, further moves could suggest that the ringgit is under-valued as the economy reopens.

So long as the yuan softens further and global growth sentiment worsens sharply, the ringgit should be trading at 4.34-4.35 to the dollar, with the next hurdle at 4.38-4.40, if the current driving factors continue, said Malayan Banking Bhd head, foreign exchange research, Saktiandi Supaat.

Helping to mitigate the pace of yuan decline is the recent cut in the reserve requirement ratio (the amount of foreign exchange reserves that financial institutions in China must hold) from 9% to 8%, starting May 15.

The ringgit devaluation had begun in ernest around late March when the yen slumped against the dollar.

It then gathered speed in a pronounced manner when the yuan also took a steep dive on April 18.

Devaluations were triggered when the market began imputing 50 basis points (bps) and even 75 bps US rate hikes in the next US Federal Reserve’s (Fed) Federal Open Market Committee (FOMC) meetings.

One study suggests that the Fed will be forced to stop raising rates when Fed Funds rates reach a mere 1% (from 0.5% currently), said former Inter-Pacific Securities head of research Pong Teng Siew.

If the Fed raises rates at its early May meeting, it may not do so again at the meeting in the second week of June, when more signs of a steep deceleration emerge in the US economy between now and the third week of June.

Ringgit weakness against the dollar will remain for the most part of the year as dollar strength will be backed by the anticipation of higher US interest rates, said Socio Economic Research Centre executive director Lee Heng Guie.

The fixing of the dollar/yuan exchange rate and developments on the Covid-19 front in China would be key issues to follow.

Together with big debt issues in the property, construction and many other industries in China, the unemployment rate in China has also spiked up.

“The ringgit will be firmer once concerns on US rate hikes and the slowdown in China are addressed,” said Fortress Capital Asset Management Sdn Bhd CEO Thomas Yong.

Movement restrictions in China due to Covid-19 developments will affect Malaysia’s exports as China is Malaysia’s largest trading partner.

The ringgit’s sensitivity to global and China risk events could be magnified, given that Malaysia’s economy is more exposed to external demand, said Saktiandi.

Malaysia’s exports stood at 61% of gross domestic product in 2020, the second highest among Asean-5 countries.

The fall of the ringgit should stop soon, as crude palm oil prices rise and US rate hikes are fully built in, said Etiqa Insurance & Takaful Bhd chief strategy officer Chris Eng.

The dollar/ringgit is currently trading at 4.35 spot; it was at 4.20 at end-March.

On a year-to-date basis, the ringgit has fallen by 3.3% versus the dollar; the bulk of the losses accelerated in the second quarter.

This was driven by factors such as the continued rise in US Treasury yields, the value of the dollar further triggered by hawkish comments from Fed officials as well as a sharp and continued decline in the yuan (which the ringgit has a strong correlation to).

Other factors point to the International Monetary Fund’s downgrade of global growth, risks of a China slowdown amid extended lockdowns and the ongoing war in Ukraine.

In the US, the overnight indexed swap (OIS) implied shows further front-loading of rate hikes with +50 bps fully priced for May and June FOMC meetings, while a more than 60% probability of a 50bps is now priced for July and September FOMC meetings.

Previously, markets were pricing in about nine hikes, but this has shifted as the OIS implied now shows 10 hikes.

The picture is complicated by an easing cycle in China at a time when US rates are expected to climb steeply.

All are monitoring closely how this conflicting turn of events will play out and how smaller, open trading nations are caught in between.

Yap Leng Kuen is a former StarBiz editor. The views expressed here are the writer’s own.