Ringgit renaissance here to stay for now
EARLY this year when the ringgit was at its most volatile period, the furniture manufacturers forecast the local currency to average at about RM4.22 against the US dollar. That was the exchange rate they inputed into their budget plan for the year.
Now as we come to the midpoint of the year, the ringgit seems to be heading to levels of RM4.25 and below against the dollar. It seems the furniture manufacturers are good forecasters.
Year to date, the ringgit has appreciated some 5% against the greenback. It is easily one of the best performers in the region but not in Asia.
In Asia, the Indian rupee is one of the best performers, improving by 6.3% against the US dollar this year. Considering the strength of the Indian rupee, Khazanah Nasional Bhd’s decision to sell its minority stake in the Apollo Hospital chain in India was a wise one.
The Indian rupee is up because of the policies set about by Prime Minister Narendra Modi. His leadership is on an overdrive to wipe out corruption and flush out the billions in ill-gotten gains stashed away in safe deposit boxes, in secret compartments and under the pillows by individuals and companies. He has also reformed the tax system to facilitate easier flow of trade between the states in a country with a population of more than 1.3 billion.
Among the major currencies, the best performer so far this year is the euro. It has taken the shine off its counter parts in the Group of 10 countries – an economic pact comprising the world’s most industrialised countries.
The rise of the euro is due to the election of Emmanuel Macron as the president of France, coupled with a set of strong economic data coming out of eurozone. Macron’s victory sent a strong signal that the euro would no be disintegrated, hence reducing the political risk. The eurozone economy is growing at 0.5% while its inflation is inching towards the 2% mark.
Capital flows into the eurozone has gone beyond the US$1.2 trillion mark and expected to grow further. Even local funds are beginning to shop around in Europe for good assets to buy.
As for the US dollar, the signals are pointing towards it seeing a movement sideways for the next few months unless there is more confidence in the leadership of President Donald Trump.
After Trump’s victory, the dollar index surged to 103 points. It has since retracted back to about 97 points, last seen in November last year when Trump won the presidency.
In the absence of exuberance from the Trump leadership, the dollar strength or weakness would be impacted by the actions of the Federal Reserve.
In the immediate term, all eyes will on the Federal Reserve Open Market Committee on June 14 when the interest rates are expected to go up by another quarter point to a band of 1% to 1.25%.
It would be the first time that the US rates would breach the 1% mark since the financial crisis in 2008. However, it is still some way to go before the rates are to reach levels that are seen as “normal”.
In the longer term, how fast the Federal Reserve shrinks its US$4.5 trillion balance sheet would impact the dollar.
The Federal Reserve’s balance sheet grew because of the quantitative easing measures taken after the crisis to inject liquidity into the system. It has not put in place a strategy yet on how it would pare down its balance sheet.
However, it effectively would entail a gradual scaling down of securities when it matures. The impact would be higher cost of funds.
This should result in a gradual rise of the long-term interest rates in the US and causing more inflows of money back to that country.
However, the downside to a rising interest rate and higher cost of funds are negative on the economy. Also a rising dollar is not good for many US companies that derive a substantial portion of their earnings outside the country.
The twin effect of a rising interest rate environment, coupled with the Federal Reserve shrinking its US$4.5 trillion balance sheet, is expected to result in the dollar not seeing much volatility in the months to come.
This window of opportunity would allow for further strengthening of the ringgit against the US dollar and other major currencies.
A key indicator would be Malaysia’s international reserves which now stands at US$97.3bil. The reserves are climbing up slowly. Managing the international reserves is something that is well within the control of Bank Negara and they have done what they can within their means to beef up the reserves.
However, there are things that are beyond the control of the central bank that would negatively impact the ringgit.
One of it is the price of oil trending back towards the US$40 per barrel. It would not be good for the Malaysian economy. The other is for the government to ensure that there is no other major corporate governance issue that crops up on their handling of public funds.
If either happens, then the ringgit will be back on its spiral down against the US dollar and even the best central bankers cannot help the local currency.