Ringgit likely to stay weak over the next few weeks
KUALA LUMPUR: The ringgit is expected to continue its weak streak following the downtrend in Malaysia’s foreign exchange (forex) reserves dropped further by US$1.4 billion to US$103 billion as at September 30 from US$104.4 billion as at end-August.
RHB Research Institute Sdn Bhd (RHB Research) economist Vincent Loo said saw that the ringgit continued to weaken by another 0.1 per cent versus the US dollar to RM4.146 in the first week of October, adding to the 0.9 per cent depreciation in September.
Year to date, the ringgit has weakened two per cent, mainly on a stronger US dollar – this was as investors flocked to safety amidst the continued tightening of the monetary policy by the US Federal Reserve.
“The ringgit is expected to remain weak in the coming weeks before settling at RM4.10 by end-2018,” Loo said in a note yesterday. “While emerging currency markets have experienced greater volatility recently, following the Turkey crisis, the volatility has subsided somewhat and contagion effects on the ringgit appears to be contained.
“This was as economic fundamentals remain strong.”
This came after taking into account the quarterly adjustment for forex revaluation changes following the strengthening of the US dollar against various foreign currency reserve assets held by Bank Negara Malaysia (BNM).
Kenanga Investment Bank Bhd (Kenanga Research) saw that the month’s declined in BNM reserves was largely attributable to a fall in foreign currency reserves by US$1.2 billion.
Additionally, special drawing rights (SDRs) declined by 8.3 per cent month on month (m-om) to US$1.1 billion while other reserve assets declined by 4.3 per cent m-o-m to US$2.2 billion in September.
In ringgit terms, the forex reserves expanded marginally by 1.1 per cent m-o-m or RM4.5 billion to RM427 billion from RM422.5 billion in August.
“So far, the ringgit remained relatively unscathed amid emerging market currencies’ rout triggered by the Turkish lira crisis and the highly anticipated US Federal Reserve interest rate hike on September 26 by 25 basis points to 2.25 per cent,” it said.
Year to date, the ringgit has fallen by 2.3 per cent against the US dollar while other Asian currencies like Indonesian rupiah, Philippines peso and Singapore dollar fell by 10.6, 8.2 and 3.4 per cent respectively.
“Subsequently, we expect the continued outflow of hot money and the threat of further depreciation of the ringgit as US dollar continue to strengthen following another US Federal Reserce interest hike by year end would not prompt BNM to raise interest rates like some of its EM counterparts,” it added.
“We believe BNM’s perennial concern would still be to maintain growth and price stability. Hence, it is likely that BNM would retain its overnight policy rate at 3.25 per cent for the year. On improving sentiment and economic fundamentals we maintain our US dollarringgit end of period forecast of RM4.05.”
Going forward, Affin Hwang Investment Bank Bhd (AffinHwang Capital) said the strong US dollar against other foreign currencies may put some pressure on Malaysia’s reserves position, especially if US dollar strengthen further against major currencies on the back of rising Fed Funds rate (FFR).
However, In the latest assessment and guidance on the US Fed’s dot plots analysis, the US Fed maintained its expectation that the Fed Funds Rate will be at 2.25 to 2.50 per cent by end 2018, and increased to three to 3.25 per cent by end 2019 and 3.25 to 3.50 per cent by end 2020.
“We believe the tightening of FFR will likely be gradual from here on, therefore, the risks of further portfolio rebalancing by international investors, leading to a strong US dollar and sharp downward pressure on emerging market currencies may be manageable.
“We believe the current high global oil prices may also provide some support for the ringgit.”
We also believe the increase in BNM’s short position, which increased to US$17.7 billion as at end of August 2018, approximately US$1.4 billion from the amount in July, was conducted in order to manage the liquidity in the forex market due partly to some foreign sell-off of bills and bonds since May.
On a cumulative basis, the country’s trade surplus has widened to RM70.5 billion in January to August 2018, as compared to RM63bn in the corresponding period of 2017.
“Given that Federal Reserve rates hike is likely to be at measured pace and Malaysia’s economic fundamental remains sound, we believe the country’s reserves level will remain at a healthy level, and hover around US$97 to US100 billion by end 2018.”