Thursday 28 Mar 2024
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KUALA LUMPUR (May 10): The surprise outcome of the 14th General Election (GE14) saw a weakening of the ringgit traded offshore, or non-deliverable forward (NDF), today to a level not seen since December last year.

On Tuesday, a day before Malaysia held the "mother of all elections" that saw the ending of the 60-year reign of the ruling Barisan Nasional, the local currency had touched a four-month low of 3.9507 versus the US dollar.

At the time of writing, the one-month NDF was trading at 4.0750 against the greenback, down a further 2.23% from Tuesday, while the three-month NDF was also 2.1% lower at 4.0820. The 12-month NDF, meanwhile, fell 2.17% to 4.1125, from 4.0250 earlier.

"I don't remember seeing such a sudden movement in the market for Malaysia since the emerging markets were punished by the shock that US President Donald Trump had won the US elections in November 2016," Forex Time Ltd (FXTM) global head of currency strategy and market research Jameel Ahmad told theedgemarkets.com when contacted.

"The major contributor to this material reaction is that investors completely underpriced any risk heading into the election," he added.

Bursa Malaysia is closed today and tomorrow in conjunction with Pakatan Harapan's victory in GE14 after claiming a simple parliamentary majority of 122 seats.

When the onshore market reopens on Monday (May 14), the ringgit could be 3% weaker, according to Bloomberg's prediction based on what the one-month NDFs implied.

These risks, however, can be reduced if political uncertainty clears up by the end of the weekend, which then means what has been seen in the offshore market may not resonate with how the market opens for next week.

"There is likely going to be a period of volatility due to the unexpected uncertainty, because no one priced into the market that this would be the election outcome. But I don't necessarily think that the market reaction will resume a negative path next week," said Jameel.

He explained now that the goods and services tax (GST) of 6% is expected to be abolished, investors will be focused on whether the new government will be able to recover revenues in other ways.

"If they are not able to confidently do that and it understandably takes some time as it is a complicated situation, we might see international investors reduce their exposure to the Malaysian bond markets," he added.

This is seen as a possible threat to the local currency because the local market might be dragged lower if rating agencies make downbeat comments that the uncertainty might weigh on their assessments of Malaysia.

Standard Chartered Global Research opined that movements of the ringgit against the US dollar will be driven in the near term by negative asset market reaction and potential measures by the authorities to contain forex volatility.

In a report today, it also guided that the recent rally in crude oil prices may not have significant positive implications for the ringgit, as the correlation between the two will likely remain weak in the short term.

On May 9, Brent crude futures were traded at US$77.43 per barrel — its highest since November 2014 after US quits a nuclear deal with Iran.

However, it is worth noting that ahead of the election, the ringgit has gained for eight consecutive months on a trade-weighted basis, from September 2017 to April 2018, although recent gains became relatively modest, it said.

United Overseas Bank (Malaysia) Bhd senior economist Julia Goh said the recent weakness in the ringgit is also in line with the softer emerging markets Asian foreign exchange, which coincides with the US dollar rally since late April.

"We expect the ringgit to remain volatile pending further details. [However], we believe that Malaysia's fundamentals remain strong and with greater clarity on the plans and proposed measures over the coming months, risks will be reassessed," she said in a note today.

 

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