‘Ringgit has turned the corner for now’

This article first appeared in The Edge Financial Daily, on May 22, 2017.
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KUALA LUMPUR: The recent rally in the ringgit was more of playing catch-up with other regional currencies, Deutsche Bank AG foreign exchange strategist Mallika Sachdeva said, noting the local currency has turned the corner for now.

“The ringgit was one of the worst performing currencies in Asia, but in the first quarter of this year, it was the best performer in terms of gains,” Mallika said at Affin Hwang Asset Management Bhd’s (Affin Hwang AM) “Investment Forum 2017” on Saturday.

Year to date, the ringgit has strengthened by 3.7% against the US dollar to close at 4.3215 last Friday. “The ringgit has turned the corner for now. Large bond outflows have stopped, the currency is undervalued and exports are recovering. The ringgit’s sensitivity to external factors has also dropped, with the currency moving very little with the volatility in commodities recently,” she added.

Foreigners turned net buyers of domestic bonds for the first time in April this year with an inflow of RM6.8 billion, following five months of selling totalling RM62.7 billion since November 2016 until March this year.

However, Mallika doesn’t see the ringgit strengthening significantly as it did in 2016 when it briefly touched the 4.0 mark against the US dollar. “The current account surplus is stabilising, but at lower levels. Demand for Malaysian assets could be more tepid, and the reserves position is much weaker than in the past. The currency’s recent rally was more a catch-up to regional gains.”

In terms of valuation, Mallika said the ringgit appears to be “cheap at the moment”. “Based on our assessment using the three valuation models, the ringgit is trading near historical undervaluation extremes. This is evident from the misalignment that we have seen in historical data and the ringgit is almost as cheap back in 2009 and early this year,” she said, without providing a guidance on the ringgit’s fair value.

A stronger currency, together with the latest quarterly data which saw Malaysia’s economy record a 5.6% growth in the first quarter of this year, could help dampen inflation and increase market confidence, Mallika noted.

“If we are seeing trends, such as large inflows into Malaysian equities continuing and there is nothing that could significantly disrupt the currency market, the ringgit should stabilise or maybe strengthen slightly. However, for a currency to completely undergo a correction, it obviously needs a convincing catalyst for it to move the market.”

To gauge the forward movements of the ringgit, Mallika said investors can look out for any new signs of slowing down from China’s economic data, as well as interprete the languages used in the US Federal Reserve’s (Fed) minutes of its monetary economic meeting.

“The Fed’s [interest rate] hike path is a key driver of the US dollar movement, while any change to its balance sheet is expected to change the course of many Asian currencies including the ringgit’s movement. This is because the end of reinvestment by the US central bank could have big implications to flows of funds in Asia.”

To improve the liquidity and further deepen Malaysia’s currency market, Mallika is of the view that “more work needs to be done in the forward and options market”.

“We note the average daily turnover in the spot and swap market hovers between US$5 billion (RM21.6 billion) and US$6 billion. However, to encourage more participation, let’s not forget about the forward and options areas too.”    

Affin Hwang AM managing director Teng Chee Wai believes the ringgit is oversold and will recover to trade at 4.2 or 4.25 this year.

“The ringgit has been oversold for a while and it is timely that it should continue its appreciation trend for the near term. The ringgit has been undervalued since the last 18 months and the [recent] correction only makes sense,” he said, adding that the local currency’s recovery is also due to the country’s trade surplus, currently at some RM8 billion per month.