What moves the ringgit?
Factors other than oil prices have a bigger impact on the ringgit.
FACTORS besides uncertainties surrounding the general election are weighing on the ringgit, which should have strengthened with rising oil prices.
Election jitters are pre-eminent given that the US dollar has been gaining ground against the ringgit since early this month and Malaysians will go to the polls on May 9.
Political uncertainties swirling around the coming general election, according to analysts, are playing only a small role in the ringgit’s movements over the past month.
Macquarie Group Ltd foreign exchange and rates strategy head Nizam Idris is discounting political uncertainties over the general election as the main cause of the ringgit’s weakness.
“I dont want to read too much into the domestic politics,” he says, pointing to the still high foreign holdings of Malaysian equities and bonds.
The main cause is the rising US benchmark bond yields, the repositioning of funds due to the higher yields and the impact this repositioning has had on emerging market currencies, including the ringgit. The benchmark 10-year US Treasury yield rose to a four-year high of 3.03%.
Looking past the elections, Nizam expects the ringgit to trade at 4.00 to the US dollar in six months. He believes the correlation between oil prices and the ringgit has been broken because of the measures put in place by Bank Negara to support the ringgit.
The measures include exporters having to convert 75% of their earnings back to ringgit from December 2016 as well as an earlier policy banning trading in offshore non-deliverable forwards.
Such measures, which Nizam views as a form of mild capital control, will continue to have an impact on the currency’s performance. “It’s not a big surprise, if it’s not freely floating, then all these correlations could break down,” he says.
The US dollar’s status as a safe-haven asset is also driving this strength and is largely due to geopolitical uncertainties stemming from US rhetoric over trade.
“We’ve had a strong US dollar view for a while and not just for the US dollar/ringgit pair. The big driver for the strong US dollar view comes from strong domestic US macro, at least in relative terms compared with other G10 currencies and that could lead to some asset repricing including higher yields and therefore the US dollar should strengthen and that’s happening,” Nizam tells StarBizWeek.
On a one-year basis, though, the ringgit has gained against the greenback. While the consensus is still for a bearish US dollar, there is room the dollar to gain strength.
Which is why currency strategists are paying attention to the direction of the US dollar, given the market expectations of four benchmark interest rate hikes by the US Federal Reserve from three hikes expected previously.
The case for the greenback’s strength becomes more evident when seen from the monetary policy point of view.
According to Malayan Banking Bhd’s Singapore-based foreign exchange research head Saktiandi Supaat, who does not discount election worries, says a policy divergence among the world’s advanced-economy central banks will put the focus back to the Fed, which is the only major central bank with a hawkish stance.
He says in an email reply that the US dollar’s strength is in line with the house view for a potential return of different policy trajectories with the other major central banks not in a hurry to tighten for this quarter (April to June) compared with the Fed.
The Bank of England is only expected to raise interest rates in December while the Bank of Japan and the European Central Bank have indicated that monetary policy would continue to be accommodating.
Saktiandi says the flow of macroeconomic data favours US monetary policy tightening. “It is even more compelling when one looks at the recent flow of data and notice that a divergence between the United States and other countries is growing,” he notes.
The data included the US factory output and housing, which continued to surprise to the upside, whereas purchasing managers indices and consumer confidence data from the European Union as well as retail sales and inflation data from Britain surprised to the downside.
Saktiandi believes that the policy and macroeconomic data divergence will continue to keep the US dollar broadly supported over the next few weeks. Higher US bond yields will also have an impact on the equity markets.
“We expect the ringgit to continue to strengthen in the second half on sound fundamentals and improving sentiment and sus- tained oil prices. We see a short-term cautious range of around 3.88 to 3.95 and maintain our view that the currency pair remains weighed by its fair value of around 3.70,” he adds.
Boost from rate hike?
Will Bank Negara raise the benchmark overnight policy rate (OPR) by another 25 basis points should the higher oil prices support economic growth?
Higher oil prices will certainly be good for government coffers, with Nomura Research analysts estimating that every US$10 a barrel increase in the price to widen the trade surplus by about 0.4% of gross domestic product (GDP) and helping to keep the current account in a comfortable surplus (3.6% of GDP as of the fourth quarter of last year).
There is a possibility that higher oil prices will mean a faster pace of economic growth as well as inflationary pressure, which in turn could mean that Bank Negara may have to raise the OPR.
Nomura Research analysts, who currently expect the central bank to maintain the OPR at 3.25%, say GDP could be revised higher from the 5.5% forecast this year after growing 5.9% last year.
Higher growth and a possible rate hike will help support the ringgit.
For that matter, another 25-basis point hike in the OPR (to 3.50%) will help ease off the pressure of the yield differentials between the benchmark 10-year Malaysian Government Securities and the 10-year US Treasury bonds.
AmBank Research chief economist Anthony Dass, who is projecting an inflation rate of 2% to 2.5% this year, which falls within the central bank’s range of 2% to 3%, believes that strong growth conditions will allow for more monetary policy normalisation.
He says, in an April 19 report, that there is a 30% chance of the central bank raising the OPR by another 25 basis points in September.
Meanwhile, Macquarie’s Nizam is gloomier than most on Malaysia’s exports outlook, saying that it will not perform as well as last year.
This will affect the currency’s outlook since higher exports proceeds last year gave a boost to the ringgit.
Nizam points to the industrial production index, which measures factory output, and the Nikkei purchasing managers index (PMI) for manufacturing, as reasons to be less confident of the external demand outlook.
“I’m not sanguine about Malaysian macro indicators,” he says. The Nikkei PMI contracted in March, after contracting in February while factory output has expanded only 3% in the first two months of the year.
Stripping out the effects of the oil price, Nizam says non-oil exports have come off quite rapidly since last June.