By Sherilyn Goh
Steve Brice
The ringgit is expected to weaken further in the medium term, by 3% to 5% against the US dollar in the next three to six months, due to poor fundamentals and the lack of positive catalysts to the currency, according to Standard Chartered’s chief investment strategist of wealth management Steve Brice.
The muted outlook for commodity prices, weaker overall balance of payment position, continual capital outflow from the debt market, and forex reserves which barely cover short-term external debts were cited as factors that continue to exert downward pressure on the ringgit.
From an oil market perspective, Brice said the market is still in excess supply, and expects further downside in oil prices to persist for at least in the next three months, against a backdrop which is clearly negative for the ringgit. The excess supply in the oil market however is expected to be gradually eroded over the course of the next 12 months.
“Demand as it picks up with gross domestic product growth should close the demand-supply gap. We should see recovery picking up by the second half of next year, and that could be a positive news for the ringgit,” Brice said during Standard Chartered’s currency outlook briefing today.
Malaysia’s trade balance has edged significantly lower over the past year following the collapse in commodity prices. Commodities account for approximately 20% of Malaysia’s total exports.
While nett portfolio outflows from Malaysia is observed for a considerable period of time, as foreigners continue to reduce their holdings of Malaysian debt, Brice said it is not clear as to what will positively change the situation today.
The StanChart executive said it is only when oil prices start picking up that investors will be more bullish on Asia.
“We are seemingly a little away from that point right now,” he said. He further noted that while foreign exchange reserves are sufficient relative to imports, they barely cover short-term external debt.
Ringgit extremely undervalued
What comes as a big positive for the ringgit though, Brice said, is that the currency has been extremely undervalued, estimated to be by between 10% and 15%, with the ringgit’s real effective exchange rate significantly below its 10-year average.
“This means (the currency) is getting more competitive, and it should help exports outside of the oil sector. It also means that currency investors will be excited (about the currency) once the fundamentals start improving and sentiments turning in favour (of the ringgit).
“When sentiments generally favour the region and emerging markets, then I think the ringgit will rally, probably stronger than a lot of currencies,” said Brice. “We are still looking for the catalysts as we remain bearish on commodities.”
The case for further US dollar strength, according to Brice, is also intact for the moment. “We do expect dollar strength to continue but nothing like we’ve seen for the past two years. And it will be more selective in terms of which currencies it appreciates against,” said Brice.
He said that the euro is also expected to hit new lows within the next three to six months, as further easing in monetary policy is expected to rid deflationary concerns and lend support to the economy.
Due to the strengthening of the US dollar amid improving US economy and expectation of US interest rate hikes, the ringgit – along with most major and regional currencies – went on a downward trend in the first nine months of 2015.
From January to September 2015, the ringgit depreciated against the US dollar by 21.4%, the Japanese yen (by 21.1%), the pound sterling (by 19.3%) and the euro (by 15.1%). The ringgit also softened between 7.3% and 19.4% against other regional currencies.
You must be logged in to post a comment.