IS the decline in the value of the ringgit a long-term structural change or just a temporary pullback? And how much lower can the local currency go against major currencies, in particular, the US dollar and Singapore dollar, if this downward trend were to continue?
These are some of the questions that have popped up following the steep depreciation of the ringgit against the greenback and the city-state’s currency.
Just this month, the ringgit has fallen 3.6% against the US dollar to trade at around 4.363 compared with 4.204 at the end of March.
Against the Singapore dollar, the ringgit has lost about 1.3% this month, quoted at 3.144 compared with 3.103 at the end of last month.
The ringgit hit an all-time low of 3.1688 against the Singapore dollar on Monday following the tightening measure by the Monetary Authority of Singapore (MAS) after inflation hit a high of 5.4% in March.
The MAS has been using the exchange rate as an anti-inflation tool since 1981, allowing its currency to strengthen whenever inflation surges to minimise the effects of rising consumer prices.
If the MAS undertakes further tightening of its monetary policy, the ringgit will inevitably weaken further against the Singapore dollar.
Currency fluctuation: A money changer holding ringgit and US dollar notes. The ringgit has fallen 3.6% against the US dollar to trade at around 4.363 compared with 4.204 at the end of March.
Meanwhile, the consensus view is that Malaysians will have to brace for further weakness in the local currency against the US dollar for the next few months in tandem with the expected depreciation of other regional currencies due to an increasingly hawkish US Federal Reserve (Fed) and growing fears of a sharp slowdown in China will push investors to safer bets.
Dominant dollar
As some economists and analysts see it, the ringgit could potentially weaken past 4.40 per US dollar in the near term, as China’s yuan continues to slide, while the greenback strengthens against most other currencies.
Noting the volatility of the ringgit, Bank Islam Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid points out that the local currency had hit a multi-year low of 4.447 against the US dollar on March 23, 2020, at the height of the Covid-19 pandemic when the country went into the first lockdown.
“Back then, the fear was the unknown: Everyone was clueless as to the severity of the impact of the pandemic fallout and how it might affect us. Now, it is a similar sentiment of uncertainty (under different circumstances) that’s driving weakness in the currency,” he tells StarBizWeek.
“The main concern among investors is pace of impending rate hikes by the Fed. The indication is that the Fed may take on an aggressive approach to stay ahead of the (inflation) curve,” he explains.
Dollar index
While expectations are for an increase of 50 basis points in US interest rates at the Federal Open Market Committee (FOMC) meeting next week, Afzanizam says, the odds for 75bps hike cannot be ruled out entirely.
“This is has spooked the financial markets,” he says.
Pending the outcome of the upcoming FOMC meeting, Afzanizam says, Bank Islam is maintaining its year-end target at 4.15 per US dollar, implying the ringgit weakness will likely be temporary.
Potential recovery
Also expecting the situation of the ringgit to get worse before it gets better, MIDF Research economist Zafri Zulkeffeli said the local currency could weaken further to 4.40 against the US dollar before improving to his group’s revised year-end target of 4.15 (from an initial forecast of 4.09).
On average, he expects the ringgit to be valued at 4.25 against the greenback through 2022.
“We view the current trend as the US dollar strengthening rather than ringgit weakening,” Zafri explains, pointing to concerns over the pace of the Fed’s monetary policy tightening in the week ahead.
Fundamentally, he says, the ringgit has room to strengthen due to positive developments in domestic demand amid the reopening of domestic economic activities, recovery in labour market and stable inflationary pressure. He adds that the country’s external trade performances remain on an uptrend particularly in the terms of manufacturing, agriculture and mining products.“With the elevated global commodity prices, Malaysia stands to benefit, given that the country is a net exporter of palm oil, crude petroleum and liquefied natural gas,” he argues.
According to Afzanizam, the higher commodity prices should help to improve the value of the ringgit.
“The government stands to benefit as it will earn more if the crude oil price rises. That would mean the government would have more fiscal space to support the economy. However, the external sector, especially the Fed’s policy action, remains a dominant factor due to its interest rate hike cycle,” he says.
“It’s mostly a US dollar view,” DBS Group senior foreign exchange strategist Philip Wee says of the main driver of the ringgit weakness.
According to Bloomberg, the Singapore-based analyst says he expects the US dollar to peak in the third quarter as attention turns to other central banks playing catch-up in normalising policy.
“This will benefit the ringgit,” he adds.
Rate differential
Not helping the situation is the dovish stance of Bank Negara, which is expected to take on a gradual approach to tighten its monetary policy. With the overnight policy rate (OPR) hovering at a record low of 1.75%, a hike in the US rate will narrow the interest-rate differential between the two countries.
Pending the outcome of the upcoming FOMC meeting, Afzanizam says, Bank Islam is maintaining its year-end target at 4.15 per US dollar, implying the ringgit weakness will likely be temporary.
The Fed last month raised its benchmark short-term interest rate for the first time since 2018, lifting its target for the federal funds rate by 25 basis points to 0.25% to 0.5%. It also signalled the possibility of raising rates six more times this year to bring the benchmark rate to just below 2%, as policymakers fight inflation that has reached a four-decade high.
The dynamics of global fund flows favour the US market on anticipation of improving yields in the United States due to the hawkish stance of the Fed and hence, the strengthening of the US dollar.
Against a basket of major currencies, the US dollar index had risen 14.4% to 103.67 points as of April 28 from 90.6 points a year ago. This month, the index has gained about 5.4%.The near-term outlook for the ringgit remains challenging, says Socio-Economic Research Centre executive director Lee Heng Guie.
“We see a short-term weakness in the ringgit due to policy rate differential, whereby the OPR adjustment by Bank Negara is expected to be gradual versus an aggressive adjustment by the Fed,” he explains, adding that Singapore has also taken an aggressive tightening path to control inflation.
Lee points out that Bank Negara is expected to take on a gradual approach in normalising rates, as supporting economic growth remains the central bank’s priority, and this requires an “appropriate and accommodative” monetary policy stance. There’s no urgency to tighten in order to control inflation in the country, as the headline consumer price index number remains manageable, mitigated by various subsidy schemes.
Bank Negara’s response
Responding to questions whether Bank Negara would address the weakness of the ringgit, governor Tan Sri Nor Shamsiah Mohd Yunus reiterates that the central bank’s focus remains on managing the risks arising from both domestic and external developments.
“While we do not target any level of exchange rate, our role is to ensure movements in the exchange rate are orderly. By that, we mean that there is no sharp or wide swings in the value of the ringgit,” she tells Bernama.
“We are ready to use the tools at our disposal to ensure these outcomes. This will help businesses plan and undertake business and investment decisions with more certainty, which will help to support a more sustainable recovery,” she adds.While Nor Shamsiah acknowledges that interest-rate differentials can have an impact on exchange rates, she says any changes to Malaysia’s monetary policy will be based on the central bank’s assessment of how recent developments will affect domestic inflation and growth prospects.
“We are only beginning to emerge from the crisis, with a favourable growth and jobs outlook. Although inflation is picking up, they are currently mostly supply-driven,” Nor Shamsiah says.
“However, we are closely monitoring if the higher input costs will further affect a broad range of goods and services, especially if the price pressures are persistent as people start spending again.”
Bank Negara’s latest OPR stance will be unveiled after the conclusion of the next Monetary Policy Committee meeting from May 10-11.
She observes that the anticipated rate hike by the Fed has led global portfolio managers to reallocate their investments into higher yielding assets in the United States.
“We are seeing this across the globe. Just to name a few, the Japanese yen is weaker by around 10.4% against the US dollar, the pound sterling by around 7.3%, South Korean won by 6% and Thai baht by 2.7%,” she points out.
“Investor nervousness about the conflict in Ukraine and signs of weakness in the global growth momentum is also contributing to the higher demand for US dollar-denominated assets as they are perceived to be a safer currency. This is also known as a ‘flight to safety’,” she added.
The VIX or investor “fear index” has risen to around 30 points currently, compared with its average of 18 points, she noted.
In addition, the International Monetary Fund has recently cut its 2022 global growth forecast to 3.6% from an earlier estimate of 4.4%.
Nor Shamsiah says concerns over the slowdown in China, particularly arising from the recent imposition of Covid-19 restrictions in major cities, have also impacted Malaysia, as the world’s second-largest economy is one of the country’s largest trading partners, accounting for close to 16% of its exports.
“To a large extent, this also explains the recent relative movement of ringgit against regional currencies, as Malaysia has stronger trade linkages with China compared with other regional countries,” she explained.
RBC Capital Markets, which has predicted that the ringgit could weaken to 4.40 against the US dollar by the end of the second quarter, says Malaysia’s economic exposure to China has turned out to be a bane for the ringgit.
“The currency is primed for more weakness so long as China’s growth risks continue to mount,” the group’s head of Asia currency strategy, Alvin Tan, tells Bloomberg.
The short-term hiccups aside, Nor Shamsiah said Malaysia needs to continue implementing structural reforms to strengthen the country’s growth potential and economic prospects to turn it into an attractive investment destination.
“As a consequence, the larger foreign direct investment and portfolio inflows, and higher output generated will naturally support the ringgit,” she said.