Ringgit weakness – more pain to come?

WITH the ringgit falling to a new 24-year low of over RM4.60 to the dollar, there could be more pain ahead as the dollar remains strong on the possibility of further US interest rate hikes.

This may give the extra nudge to the local economy through re-invigorated exports while it is still plodding along the recovery process.

However, a weak ringgit spurs domestic inflation; if interest rates rise to try to curb that inflation, interest-rate sensitive sectors of the economy will be hobbled.

Dollar strength may persist for longer and the dollar/ringgit exchange rate risks testing fresh highs, as the US Federal Reserve (Fed) remains resolute in controlling inflation at the expense of growth.

For the next few months, concerns about global growth and risk aversion will also continue to support the dollar.

The ringgit risks further breakouts beyond RM4.60 to the dollar, if hawkish signals from the Fed intensify.

While the dollar/ringgit exchange rate is likely to continue rising, the momentum has slowed as it moves above RM4.55 to the dollar; there are likely to be more upside moves until the next US Federal Open Market Committee (FOMC) meeting on Nov 1-2, 2022, where markets will assess the tone of the FOMC statement with regards to inflation and rate hikes.

“But a sustained period of volatility and extended ringgit losses is not our base case by year-end,” said Maybank group head of foreign exchange research Saktiandi Supaat.

On the domestic front, elections and associated near-term uncertainties may lead to higher volatility for the dollar/ringgit exchange rate.

For a scenario of contained ringgit volatility/losses on election uncertainty, there should be clear signs that the next ruling party/coalition is able to maintain policy continuity and economic traction, post-recovery from Covid-19.

In the last elections in 2018, the dollar/ ringgit exchange rate did rise by more than 8% from the second to third quarter of 2018; the bulk of this upswing can be attributed to broad dollar strength (dollar index +6%) and oil price softness (minus 20%) over the same period.

The actual elections-induced impact on the ringgit was likely modest; the Bank for International Settlements estimated the ringgit real effective exchange rate basket fell by 1.5% over this period, added Saktiandi.

The recent round of escalation in Russian geopolitical tensions over Ukraine suggests that the conflict could drag on for longer, leading to the risk of higher inflationary pressure and of a hard landing, said OCBC Bank (Malaysia) foreign exchange strategist Christopher Wong.

The combination of tighter financial conditions, slowdown in China, an energy crisis in Europe and disruptions in supply chains further fuels global growth concerns and sustained weakening in the yuan that has gone past seven yuan per dollar.

This adds some downside to Asian ex-japanese yen currencies, including the ringgit; given Malaysia’s dependence on food imports, a weaker ringgit stokes imported inflation.

Importers will find it more costly to purchase in dollars and pass on the costs to consumers, thus setting off further inflationary pressures.

Thus far, Malaysia is benefitting from commodity and technology exports; while the country’s external trade outlook is buoyed by ongoing commodity price support, it is impacted by the downside of global economic concerns.

On the positive side, the ringgit weakness makes Malaysia more competitive in attracting foreign direct investments, especially in the case of foreign companies looking for a destination with strong fundamentals, economic resilience, stable regulatory policy and that is rich in resources, said United Overseas Bank (Malaysia) senior economist Julia Goh.

Quite a long spell of pain could be ahead; an end to the Fed rate hike cycle may only come after a prolonged period of economic pain that will likely last too long for comfort, said former Inter-pacific Securities head of research Pong Teng Siew.

The present bout of US inflation is more rooted in supply side developments than those on the demand side, and hence, will respond less to monetary policy in the form of aggressive rate hikes.

Nostalgia for the good times will see many clinging to the past of seemingly “endless plenty” and hoping this will be revived in the future.

The markets’ hopes for a cycle of monetary easing following this round of tightening is evidence of such nostalgia, added Pong.

It may take some time for the external environment to improve, and hence, for the ringgit to recover.

“For now, the market may be cautious towards the ringgit against the dollar but it still has the potential to outperform some other currencies like the pound,” said HSBC global head of foreign exchange research, Paul Mackel.

Still, the ringgit is still relatively stronger against some regional trade partner currencies.

Year-to-date, the ringgit has fallen 8.8% against the dollar while most Asian ex-japanese yen currencies including the baht, yuan, peso, new Taiwan dollar, won and yen have depreciated by 10% to 20%.

The Fed is seen ending its rate hike cycle early next year and this should give the ringgit stability but the near-term risks are higher, given the volatility in financial markets and external uncertainties, added Mackel.

While the ringgit’s underlying fundamentals have not changed, negative external factors are more dominant at this juncture.

As long as the Fed stays on course for outsized rate hikes in the coming months and worries on China’s economy persist, most Asian currencies including the ringgit will be on the defensive against the dollar, added Goh.

There are always pros and cons to currency strength and weakness but a period of prolonged weakness can bring about undesirable effects of imported inflation.

“For now, the market may be cautious towards the ringgit against the dollar but it still has the potential to outperform some other currencies like the pound.” Paul Mackel