Thursday 28 Mar 2024
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SHORTLY after Prime Minister Datuk Seri Najib Razak was elected into office on May 5, 2013, in the 13th General Election, the ringgit rose to 2.9625 against the US dollar. The market welcomed Najib’s election despite the ruling coalition, Barisan Nasional, losing the popular vote and failing to regain the cherished two-thirds majority in Parliament.

However, the ringgit’s stay at the 2.96 levels was brief. The local currency made a slow but steady descent from that point before tumbling to its lowest level this year, at 4.2460 against the US dollar. Its decline was due to the nation’s political melodrama and global volatility.

Given the continued uncertainties both at home and on the global front, views on where the ringgit is heading are mixed.

Bloomberg data shows that bets on the ringgit’s performance differ widely. For the third quarter of 2015, some currency experts project the ringgit’s worth at 3.65 to 4.20 against the greenback. The range is broader in the longer term, with estimates ranging from 3.40 to 4.90.

The ringgit traded at 4.199 to the greenback last Friday.

CME Group senior economist Erik Norland says, “With the recent decline, I think the ringgit is in the process of being appropriately valued. But, the thing with markets is that sometimes, when something is overvalued and [then] becomes appropriately valued, there is a momentum to push it down to undervalued … I would not be surprised or shocked to see the ringgit go down to 4.50.”

The risk with the ringgit is that there are plenty of factors and time to create the downward momentum that Norland talked about.

One of them is the unpredictability of China’s currency policy. In July, when the Chinese government devalued the renminbi by 3%, regional currencies were sent tumbling, but the ringgit suffered the most, losing 3.92% against the US dollar in a week.

Norland expects the renminbi to continue to be devalued by as much as 10% over the next two years. This means that currencies within China’s sphere of influence will continue to come under pressure.

Another factor is the lack of clarity on the interest rate hike by the US Federal Reserve at a time where most central banks are moving in the opposite direction. This was largely anticipated to happen in September, but prospects of that happening have diminished after China’s unexpected currency devaluation. The Fed still has three policy meetings before the end of the year to decide on a rate hike. Until a change of interest rate policy in the US materialises, the ringgit will remain in limbo, say currency traders.

In the meantime, Bank Negara Malaysia may be obliged to support the ringgit, usually to ease wild fluctuations. Whether it will choose to defend the ringgit more vigorously remains to be seen.

No doubt, some will argue that many of these factors are known to the currency market and therefore priced into the ringgit. But the currency is easily distressed, breaching several technical, psychological, support or resistance levels this year, showing that its bottom may still be undefined territory.


This article first appeared in digitaledge Weekly, on August 31 - September 6, 2015.

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