Ringgit at 13-year high against US dollar ;).
KUALA LUMPUR: The ringgit rose to a fresh 13-year high versus the US dollar yesterday, breaking the 3-mark for the first time since the end of the 1997-1998 Asian financial crisis.
From 3.005 against the USD last Friday, the local currency appreciated to 2.995 at noon yesterday, and ended at 2.991.
This is the first time the ringgit has advanced beyond the 3-level against the greenback since October 1997.
The ringgit’s current level is some 21% higher than the 3.80 ringgit-USD peg that existed from September 2008 to July 2005.
Prior to the Asian financial crisis, the ringgit had mostly traded at around the 2.50 to the USD.
Economists, however, were slightly weary of the situation, noting that the ringgit’s strength was mainly caused by the USD’s wide-scale depreciation as well as fund flows into the region.
While a strong ringgit will benefit importers and consumers, it will affect Malaysia’s export competitiveness relative to economies whose currencies are more aligned to the USD, such as China and countries in Indochina, an analyst noted.
“We expect the ringgit to hit 2.95 against the greenback this year. The recent movement in favour of the ringgit is therefore not altogether surprising. However, the important thing to note is that it is the weakness of the USD rather than the strength of the ringgit which is driving the exchange rate,” MIDF head of research Zulkifli Hamzah told The Edge Financial Daily.
“This is reflected by the other cross-rates, which show the ringgit losing ground next to other currencies”, said Zulkifli.
The USD weakened against all major currencies, with the dollar index, which is tracked against a basket of major currencies, slipping 3.8% to 74.113 from 77.049 recorded just on March 1.
In the past 12 months, the greenback has depreciated 6% against major currencies.
Over the last decade, it has lost 40% of its value.
CIMB head of economic research Lee Heng Guie also pointed out that external factors had helped push the ringgit.
“It is the dollar’s broad-based weakness story, due partly to the recent S&P’s downgrading on the US sovereign outlook,” Lee told The Edge Financial Daily. He added that the fundamentals remain supportive of the ringgit.
Better economic growth, improving prospects for corporate earnings and the building surplus in the current account are said to provide a solid backbone for the ringgit.
Bank Negara in its annual report released earlier this month projects for the current account surplus to hit RM100.7 billion.
Conversely, the country’s fiscal deficit is expected to fall 20 bps to 5.4% of GDP this year.
“Another swing factor for the ringgit is the inflow of private capital into emerging markets, including Malaysia, which also drives the ringgit higher. This forces Bank Negara to intervene intermittently to moderate the pace of the ringgit’s appreciation,” said Lee.
He emphasised that Bank Negara’s foreign exchange holdings surged by US$8.4 billion (RM25.14 billion) in the first two weeks of April, a reflection of the central bank’s proactive foreign exchange intervention.
JP Apex Securities analyst Ng Keat Yung also opined that the ringgit’s impressive performance could be attributed to its own strength.
“It is the ringgit’s strengthening, helped by the positive fundamentals of the Malaysian economy,” said Ng earlier.
Speaking to Bernama, a currency trader said the government’s Economic Transformation Programme (ETP) had fuelled optimism amongst investors. He perceived that the ringgit was still undervalued, and could appreciate further to between 2.80 and 2.85 versus the USD by year-end.
“The trend for a stronger ringgit has been there for the past two weeks and it will invite more local and foreign investors into the local market,” said the trader.
Another major driver for the ringgit’s climb is the expectation for Bank Negara to raise interest rates to combat growing inflation.
Last Wednesday, it was announced that the country’s inflation rate climbed to 3% in March, from 2.9% in February and 2.4% in January.
The 3% leap in March is the biggest since April 2009, when the inflation rate stood at 3.1%.
Economists anticipated the increase, as a Bloomberg survey had predicted the CPI would increase 3.1% on the back of rising commodity prices.
Bank Negara has kept the overnight policy rate (OPR) at 2.75% since July, following three increases in early 2010.
The central bank expects inflation to average 2.5% to 3.5% this year.
The Monetary Policy Committee is due to meet next on May 5.
In contrast to the subdued inflationary pressures and record low interest rates in the US, inflation has been a prime concern in the region.
Countries including China, India, South Korea, Indonesia, Thailand, the Philippines and Taiwan have all implemented interest rate hikes in an effort to manage inflation.
Several Asian currencies rallied along with the ringgit, in anticipation that central banks in the region will raise interest rates further.
High interest rate differentials between emerging countries and the developed world, expectations of more rate hikes and better growth prospects are also fuelling the entry of speculative funds into the region.
Additionally, rising commodity prices pushed the Australian dollar to a 29-year high as it traded at 1.077 against the US dollar yesterday.
In a report issued last week, Barclays Capital said it expects the ringgit to undergo further appreciation, as it is flanked by the country’s large balance of payments surplus and rising commodity prices.
A higher flow of funds into the equities market is also expected to boost the ringgit.
The strong ringgit is not only good news for Malaysians taking their holidays in the US, China or Hong Kong, but also a number of sectors.
According to analysts, beneficiaries of a firmer ringgit are import-based industries or those with large US dollar-denominated costs or borrowings. They include the automotive, consumer and airline industries.
Conversely, the losers are primarily export-oriented industries which will earn less in ringgit terms for foreign currency-denominated sales.
These include latex glove makers, semiconductor and hard disk drive sectors.
Oil and gas entities have contracts denominated in US dollars, although the impact is mitigated by the fact that oil prices are hitting three-year highs, which encourages further exploration activities.
The impact on the plantations is probably neutral, as palm oil prices are expected to be weighed down by higher output and stocks in the second half of the year.
Crude palm oil prices are denominated in ringgit, and a stronger ringgit will make it less competitive versus other edible oils, such as soyoil, which are denominated in USD.
However, a weaker US dollar will also boost commodity prices in general.
Who said? Sheikh Al-Zaquan said ;).