Malaysian ringgit losing grip to Fed’s hawkish stance, depreciates to RM4.48 against USD

THE Malaysian ringgit has fallen to its lowest level in nearly 6 years and economists are expecting the downtrend to continue gradually due to sluggish commodity prices and the hawkish pivot by the US Federal Reserve.

The currency traded at RM4.4850 against the greenback as at 6pm on Monday (Aug 22), the lowest since January 2017 (RM4.4975). The country’s currency has depreciated 7.3 per cent year-to-date, from RM4.1763 on Jan 1, 2022.

Against the Singapore dollar, the ringgit firmed at RM3.2159 after reaching its all-time low at RM3.2573 on Aug 10. The ringgit has depreciated close to 3.4 per cent year-to-date.

United Overseas Bank (UOB) senior FX strategist Peter Chia said most Asian currencies, including the ringgit, will be on defensive mode against the greenback as the Fed has reiterated its stance to fight the soaring inflation.

“With the Chinese Yuan continuing trading weaker against the US dollar due to concerns on Covid-related lockdowns, this has also weighed on the ringgit movement,” he told The Business Times.

Anthony Dass, chief economist and head of research of Ambank Research, said the Dollar Index has surged 0.64 per cent to 108.17 on Aug 19, which he describes as “a level we have not seen since mid-July”.

“The trend is supported by ‘stubbornly hawkish’ remarks by the Fed officials. We expect Malaysian ringgit to trade between the support levels of RM4.465 and 4.475 while the resistance is pinned at RM4.57 and 4.63,” he said in a note on Aug 22.

Last week, St Louis Fed president James Bullard expressed his stance to support a third consecutive 75 basis point interest rate hike in September, with San Francisco Fed president Mary Daly sharing the same view.

“The expected weakness of the ringgit from here is likely to be more gradual as Malaysia’s fundamentals remain strong. We expect the ringgit to trade at RM4.52 in end-2022, followed by RM4.54 by June 2023,” said Chia.

Trading Economics forecasts that the ringgit will trade at RM4.50 by the end of third quarter, and continue to trade lower at RM4.57 in 12 months’ time, based on its global macro model and analysts’ expectations.

Another Bloomberg report, citing Singapore NatWest Markets emerging markets strategist Galvin Chia, said the dollar-ringgit movement is determined by portfolio outflows and if the currency breaches RM4.5002, it will take the ringgit back to its historical low of RM4.88 back in January 1998.

However, CGS-CIMB Securities head of Malaysia research Ivy Ng said such a situation is unlikely as she anticipates the central bank will step in if the ringgit were to breach the psychology level of RM4.50.

“Bank Negara’s monetary policy committee (MPC) has another 2 opportunities to raise the interest rate, either in September or November’s meeting. We expect there will be another 25 basis point hike in coming months, bringing the overnight policy rate (OPR) to 2.5 per cent by year-end,” she said.

Malaysia has increased the OPR by 25 basis points (bps) to 2.25 per cent in July this year, after the hike of 25 bps in May 2022. Before this, the OPR has stayed at a record low of 1.75 per cent since July 2020.

Other than the hawkish stance by the Fed, Ng noted that short term uncertainties – the ongoing 1MDB court case and early election concerns this year – have dampened market sentiment.

“Our earlier report forecasts the ringgit to trade at RM4.25 by end of this year. This forecast was derived from the country’s healthy fundamentals – the strong GDP growth in the second quarter – but the currency movement could be swayed by market sentiment,” she added.

The weakening ringgit also sparked the concern of surging inflation in Malaysia. The country will be announcing its consumer price index (CPI) on Aug 26, and economists expect the CPI to increase by 4.4 per cent year-on-year from 3.4 per cent in June.

Geoffrey Williams, economics professor and dean of the Institute of Postgraduate Studies at the Malaysia University of Science and Technology, said that although weakening will have an impact on imported goods, the government’s subsidies and price cap measures on necessity items have helped to keep inflation under control.

Bank Negara Malaysia expects the average headline inflation to range between 2.2 per cent to 3.2 per cent this year.