by MARK RAO / pic by BLOOMBERG
The ringgit could trend closer to the RM4-M4.10 range against the US dollar, but much of the gains will ride on how the dynamics of improving export earnings versus external debt play out, according to analysts.
OANDA Corp head of trading for Asia-Pacific Stephen Innes said the local unit’s fair value is within this range when benchmarked against regional markets and commodity currencies, with the One Belt, One Road initiative and domestic consumption patterns supportive of local economic growth.
He added higher US interest rates could pose a challenge to the ringgit, as the bulk of Malaysian debt is US dollar-backed.
“With just under two-thirds of Malaysia’s external debt denominated in foreign currencies, with a hefty chunk in US notes, higher US rates will hurt the ringgit,” he told The Malaysian Reserve.
“But much of the debt is hedged offset by export earnings or other financial instruments. Given the substantial global growth expectations, I think this bodes well for exporting nations like Malaysia and will make servicing the debt obligations that much more comfortable.”
Innes anticipates a stronger ringgit based on favourable risk sentiment on the back of global growth, adding that Asian countries have actively bolstered their reserve situation which should guard against any fallout resulting from a US Federal Reserve (Fed) balance sheet reduction.
The ringgit surpassed the RM4.20 mark against the greenback early last month, trading between RM4.1875 and RM4.2080 from Sept 8 to Sept 25 this year.
It has since trended lower against the US dollar as the market attempts to ascertain who will succeed the chair of the Fed and what it means to Fed rates. The ringgit closed at RM4.2265 yesterday.
The World Bank also positioned Malaysia as the most exposed to exchange-rate risk compared to other developing economies in East Asia and the Pacific.
In a Bloomberg report yesterday, the Washington-based lender’s representative was quoted as saying that countries like Malaysia have sizable external debt despite adequate foreign-exchange reserves.
It said economic policy uncertainty in some advanced economies, escalation of geopolitical tensions and budget deficits, which are to remain high or to rise in most countries over 2017 to 2019, are among the growth risks faced by Asian currencies.
Innes said the aforementioned risks remain live factors in the ringgit’s performance, but that Malaysia’s well-positioned low unemployment rate and currency stability continue to make the country an ideal hub to attract more foreign direct investment.
Speaking on the upcoming general election, Innes said the Malaysian currency will remain supported into the elections because it is presently undervalued relative to its regional peers.
“The market view is that a two-thirds majority for the ruling Barisan Nasional coalition will be positive for the ringgit, although the odds of this occurring are paper-thin. If the ruling coalition secures less than half the parliamentary seats, this will be negative for the ringgit, but this is an improbable scenario.”
At the macro level, global purchasing managers’ index performing in the green, the US Institute for Supply Management surging to the highest level since May of 2004, robust data from China and rising Korean exports bode well for Asian currencies, according to Innes.
“Despite the likelihood of a Fed hike in December and the plenitude of uncertainties currently facing the G-10 landscape, the Asian emerging markets background portends favourably for local exporting countries,” he said.
“The undeposited and undervalued Malaysian ringgit could find significant support in this scenario.”
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