The ringgit – a bet on sentiment

THE question on many people’s mind today is how much worse can the ringgit fare against the US dollar, or rather, will anything work to break the freefall the local currency is experiencing.

Unfortunately, the local currency’s trend now is as unpredictable as the weather, even for seasoned analysts.

Early this month, analysts were certain that the currency would not hit the 4.00 mark against the US dollar.

The expected Federal Reserve rate hike, domestic issues and the eurozone crisis were the main considerations.

In fact, none of the analyst forecasts compiled by Bloomberg expected the ringgit to fall to RM4.00 by this year.

Alas, on Aug 12, the currency weakened past the key psychological level of 4.00 to the US dollar, a level not seen since the Asian financial crisis in 1998. This time round, the ringgit’s drop was exacerbated by the devaluation of the yuan.

The rapid pace of the ringgit’s decline baffled analysts and even foreign exchange dealers, with many refusing to give forecasts for the ringgit, as others just sighed at the question.

A prominent local economist recently told this scribe that any analyst or economist that speaks of the ringgit today “risks losing their credibility”.

Who would blame him for saying that? In a one-month period, the ringgit’s value has eroded by 10.92%, while the FBM KLCI has deteriorated by 9.59%.

Currency traders have upped their bearish bets on the ringgit since the currency passed the chart support level around 3.800, the level at which Malaysia had fixed it to the dollar during the 1997/98 Asian financial crisis. The peg lasted until July 2005.

The ringgit is the weakest performer this year among regional currencies as it is caught in the country’s changing domestic and external cross currents.

Apart from the expectation of a US interest rate hike, which has recently cooled, and China’s stock plunge, the sharper drop in the ringgit compared with its peers was made worse by the ongoing drop in global energy prices as well as negative news flow on the domestic political front. All these factors have and are greatly sapping investors’ confidence in the country.

Let’s not forget that foreign investors hold nearly half of outstanding Malaysian government bonds.

However, concern that China’s economic slowdown will eventually affect Malaysia’s economy has led to further capital outflow, mainly from the bond market.

Together with other fixed income instruments, investments held by foreign investors stood at RM206.8 billion as at end-July, a drop from the peak of RM257.2 billion in July 2014, indicating that foreign investors have been unwinding their holdings.

Still, this amount takes up over 50% of Malaysia’s foreign exchange reserves, hinting that Malaysia could be vulnerable to a sudden reversal of fund flows.

“Capital flight of this size could come as a ‘shock’ to the system and is important for Malaysia to continue maintaining investor confidence in its management of the economy,” RHB Research said in a recent report.

MIDF Research yesterday cautioned that a higher pace of capital outflow will push the ringgit lower, despite no significant evidence yet of deteriorating economic fundamentals.

As the drop in the ringgit is driven more by negative sentiment than reflective of the fundamental condition of Malaysia’s economy, predicting the direction of the ringgit is getting as hazy as the weather .