More volatility ahead for ringgit

The Edge Malaysia, June 24, 2013

By Ben Shane Lim

The strengthening against the US dollar for most of the year, the ringgit has seen a sharp reversal going from less than 3.0 in early May to its weakest in a year at 3.2 last Friday.

Last week was also the currency’s worst weekly performance in nearly three years, tumbling 2.94% against the greenback after US Federal Reserve chairman Ben Bernanke indicated that the Fed’s US$85 billion monthly bond buybacks were likely to slow down towards the end of this year.

Bernanke said he expected to see continuing gains in labour markets, supported by moderate growth that is expected to pick up over the next few quarters as the near-term restraints from fiscal policy and other headwinds diminish. Nonetheless, he added the economy started showing signs of weakness, the Fed was prepared to return support.

Meanwhile, disappointing economic numbers out of China heaped more selling pressure on the ringgit. “The ringgit has been hit by both the increased uncertainty surrounding the Fed’s exit strategy from the quantitative easing (QE) and slowing regional growth expectations, highlighted by weaker-than-expected data in China,” says Dominic Bunning, HSBC’s associate director for FX strategy.

Last week, HSBC’s Flash China Manufacturing Purchasing Managers Index (PMI) came it at 48.3 in June, below expectations of 49.1. A reading below 50 indicates a contraction in the manufacturing sector, fuelling concerns of a Chinese slowdown.

“Both these factors are creating more headwinds for Asian currencies and the ringgit is not immune,” says Bunning. “In fact, the ringgit also looks to be the worst performing Asean currency against the greenback, falling more than 8.2% since early May. In comparison, the Singapore dollar weakened by 3.7%, while the baht, Philippine peso and rupiah fell 6.3%, 7.2% and 2.8% respectively.

“Malaysia does not stand out as the worst hitin Asia, but is among the underperformers. Given the current market conditions, direct trade linkages are likely to be less of a driver of currency performance. One likely reason why the ringgit has faced difficulties is the heavy level of foreign ownership in the local bond markets, which could come under pressure from repositioning or FX hedging.”

Malaysian government security (MGS) yields have been on the rise, mirroring the 10-year US Treasure bond yields which rose to more than 240bps, its highest since late 2011.

Local equities, however, continued to be relatively resilient with the benchmark FBM KLCI ending the week virtually unchanged, slipping only 0.37%. Ironically, US equities took a tumble with the Dow Jones Industrial Average falling 2% last week.

HIS Global insight’s chief economist Rajiv Biswas points out, “The ringgit has a dual vulnerability to the recent sell-off of risk assets, as both emerging markets currencies and commodities have been hit, making the ringgit more vulnerable than some other East Asian currencies due to Malaysia’s significant exposure to resource exports such as energy exports as well as agricultural commodities such as palm oil.”

Hong Kong-based Bunning notes that Malaysia’s trade surplus has been narrowing, “so there has been less direct support for the currency through that channel”.

In April, Malaysia’s exports contracted 3.3% y-o-y to RM55.81 billion, compared with a contraction of 2.9% in March, The decline was pinned on lower sales to major importers like China, Japan and the US, the Department of statistics says in a statement.

Looking beyond the current knee-jerk reaction, Singapore-based Rajiv expects the ringgit to be supported by Malaysia’s diverse export profile and its excellent record of sustained current account surpluses and large foreign currency reserves.

“The indication by the Fed that it can start withdrawing QE is actually a signal that US recovery is assessed to be strengthening, which will support global economic recovery. This is actually a positive signal for East Asian export growth in 2014,” he says.

Meanwhile , can the ringgit fall further?

“If the tapering off by the Fed occurs sometime at the end of 3Q2013, based on the trajectory of US economic performance forecast by the Fed, then yes, there is potential for the ringgit to continue its weakness. But still the ringgit will move alongside the rest of the emerging Asian currencies and not in isolation. For now, we are keeping the 3.2 target for 3Q2013 and 3.15 for the year-end.” Says Suresh Kumar, CIMB Group Holding Bhd’s senior vice president of regional rates and foreign exchange strategy.

Suresh adds that his forecasts are still subject to revision based on how strong a message Bernanke intents to provide at the next Federal Open Market Committee meeting in July, which will be a catalyst for providing markets with actual framework on the QE –tapering exercise.

For the time being, volatility is likely to persisting foreign currency markets, says Bunning. “We need to see US treasuries stabilize before feeling more comfortable that the US dollar will then stabilize versus Asian Currencies.”