Ringgit unleashed

IS confidence coming back to the ringgit? It appears so, although in the face of a broadly weaker US dollar, it can be hard to gauge the fundamental strength of the ringgit.

The strength of a currency usually reflects the economic fundamentals of a country. It is not surprising that the ringgit is strengthening because economic growth in the first half of the year has beaten forecasts, but how convincing is this strength?

There has been a more discernible trend of US dollar weakness since the middle of last week that has accelerated through this week. This has definitely benefited the ringgit and other emerging-market currencies.

But what makes the ringgit more convincing is the rise against other currencies too. It has strengthened in the past week against the yuan, the Singapore dollar, the baht and the rupiah.

Perhaps, investors are finally convinced about the economic fundamentals and that the ringgit’s rise is no longer just about the US dollar weakness.

The Malaysian economy’s outlook for this year has also been revised higher and there are hints that higher growth numbers will be made official when Budget 2018 is tabled in Parliament later next month.

Exports have been surging and private consumption numbers appear to be holding up despite the wobbles from inflation, which while moderating from the March peak, is still elevated.

Looking past the headline numbers, external demand does look robust. The latest trade data from July shows that electrical and electronic (E&E) goods, which make up 35.5% of exports, surged 28.3% yearon-year.

Looking ahead, the export-driven E&E subsectors will do well, as projections show global semiconductor sales to grow by 11.5% this year.

With a growing manufacturing sector, there will be a spillover effect on the rest of the economy and especially on the services sector, which is more domestic-oriented. It is to be hoped that employment and wages will rise as businesses expand, contributing to private consumption and investment.

Another way of looking at growth indicators is to look at the levels of imports and these look healthy. Intermediate goods, which are used for components for other manufactured goods and consumption goods, especially the segment for household goods, were up in the month of July, both on-year and month-on-month. Businesses continue to expand, as seen from banks’ business loans growth and capital goods imports.

Given that the Malaysian economy is part of the global supply chain, how well her trade partners fare is as important. And the good news is that private consumption was the main growth driver of the US economy in the second quarter, while China’s second-quarter macroeconomic data indicates that domestic demand remains the mainstay of growth.

Then, there is the matter of a rate hike. The latest Bank Negara statement did not indicate that the benchmark overnight policy rate will be raised anytime soon despite rising core inflation, which unlike the more familiar headline inflation, excludes energy and food prices.

Expectations of a rate hike are sure to rise as economic growth sustains, as this will bring with it inflationary pressure. Investors may find yields of ringgit-denominated assets more alluring if the benchmark rate is raised, which could mean a stronger ringgit.