Unshackled after polls, ringgit regains strength

The Malaysian ringgit, which took pause yesterday after a post-election surge, is likely to stay strong and end the year at around 3.00 against the US dollar, a level rarely seen over the last 16 years since the Asian financial crisis, according to a median forecast by analysts.

This is provided Malaysia's current growth momentum persists, the external recovery continues apace, and any lingering political risks of destabilising disputes over election results or a leadership challenge within the ruling coalition do not materialise, they said.

Early yesterday, the ringgit extended Monday's 1.9 per cent surge to a 21-month high, rising as much as 0.8 per cent to 2.9570 against the US dollar. But these gains were gradually shaved away through the day. Traders told Reuters that Malaysia's central bank bought dollars at around 2.9600 to rein in the ringgit's appreciation.

"There were whispers of BNM (Bank Negara Malaysia) stepping in, even on Monday. Our view is that 'leaning against the wind' activity by the central bank is there, plus possible support by local pension funds who are flush with liquidity selling USD/MYR to support the pair," Maybank head of FX research Saktiandi Supaat told BT yesterday.

The currency had weakened 0.17 per cent to 2.9825 per US dollar as at 7.03pm. It strengthened to as much as 2.4038 against the Singapore dollar in the day, before weakening slightly to 2.4183 by 7.04pm, according to Bloomberg data.

Most analysts reiterated their view that the initial "relief rally", after election results returned the Barisan National coalition to power, has been excessive. The ringgit is thus likely to see volatility and weaken slightly from present levels in coming weeks.

Mr Saktiandi expects the ringgit to "whipsaw in the near-term" with a support level of 2.96 against the US dollar and expects appreciating pressures to dissipate as euphoria fades.

After the election, he adjusted his ringgit forecast for the end of Q2 to 3.03, from an earlier 3.05. He expects the ringgit to strengthen further in the second half, to 2.98 by the end of the year. This is slightly stronger than the 3 ringgit to a dollar Q4 median forecast of 26 contributed forecasts on Bloomberg.

Only on a few occasions in the last couple of years has the ringgit become stronger than 3.00 to the dollar since the Asian financial crisis: in April-May and July-August of 2011 and briefly in February last year. Apart from these, the last time the ringgit strengthened past 3.00 to the dollar was in 1997, in the middle of the unfolding regional crisis.

Then, the ringgit had suffered a sharp depreciation against the US dollar, losing almost half its value before the central bank pegged the ringgit at 3.80 to the dollar in September 1998, lifting the peg close to seven years later in July 2005.

However, the ringgit is seen as a laggard for whom appreciation is now overdue. "The currency's fundamentals are in fact positive," said Sim Moh Siong, senior currency strategist, Bank of Singapore.

Resilient economic growth, well-behaved inflation and a strong external position indicate that the ringgit ought to have strengthened and even outperformed its Asian peers in the past year, said Mr Sim. But it did not do so due to political concerns over the imminent elections. "Now that these are out of the way, and assuming public order is maintained, then the fundamentals should reassert themselves," said Mr Sim.

The leading party of the ruling coalition, Umno, holds elections at the end of the year. While it would confirm Prime Minister Najib Razak's leadership of the party and government, it could generate some uncertainty too, said UOB economist Ho Woei Chen.

Acknowledging that there is some political risk to the currency's trajectory, Mr Sim thinks the economic risks are still weightier. "The ringgit, to an extent, is a commodity currency. Commodity exports are a major component of the export base," he said. Hence, a sharp slowdown in global growth or China's growth that might lead to a fall in commodity prices, would hit the ringgit.

Uncertainties over the pace of what is still a fragile recovery in the global economy also means volatility in the ringgit is likely, said Ms Ho, who expects the ringgit to hit 3.03 to the dollar at the end of the year.

Ringgit strength may be capped by a likely appreciation of the US dollar - especially if the US economy's recovery is sustained and the Federal Reserve decides to roll back some of its quantitative easing, Mr Sim said. He has factored this into his forecast that the ringgit will strengthen to 2.98 against the dollar in 12 months time.

"Domestically, growth appears to be holding up. So unless investments are affected, the economic growth would be supportive of the ringgit," Ms Ho said.

As the ringgit and the Singapore dollar tend to track each other quite closely, Ms Ho thinks it unlikely that any appreciation of Malaysia's currency would have a significant impact on Singapore's traders and exporters.

Malaysia's central bank is widely expected to leave interest rates unchanged for a 12th round at its policy meeting on Thursday, given that growth remains steady and inflation has been kept low.

The strong ringgit would further ease any concerns policymakers might have over upward price pressures. The overnight policy rate has been held at 3 per cent since May 2011 to spur growth.

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