KUALA LUMPUR (July 25): The ringgit depreciated to its weakest level against a strengthening Singapore dollar at 3.2154 on Monday (July 25) on the likelihood that the Singapore Central Bank will tighten monetary policy again in October if inflation pressures persist. The ringgit is not the only currency that has depreciated against the Singapore dollar. It is not the worst hit either.  

Since the exchange rate's close last Friday (July 22) at 3.2032, the ringgit had traded at between 3.2020 and 3.2110 in the morning. It then surged to trade at between 3.2094 and 3.2160 in the afternoon following Singapore’s report on its June inflation data, with core inflation hitting a 13-year high.

Besides a strengthening Singapore dollar, the weakness in the ringgit was partly attributable to the worsening Covid-19 situation in most parts of Asia, especially China, and growing European political risk, according to Kenanga Investment Bank Bhd.

The research firm wrote in a note on Monday that it believes the ringgit would trade above the 4.45 level against the US dollar amid weak global sentiment and the US Federal Reserve’s (Fed) jumbo rate hike.

“Despite Malaysia’s better-than-expected trade readings and a 1.2% fall in USD index (DXY) due to the European Central Bank’s (ECB) 50 basis points (bps) rate hike (on July 21), the ringgit breached the 4.45 threshold for the first time since March 2017 against the US dollar.

“The local note may continue to trade above the 4.45 level against the US dollar as a potential 75 bps rate hike by the Fed may provide the DXY a knee-jerk boost.

“On top of that, lack of domestic catalysts, China’s economic uncertainty and weak global sentiment are likely to cap any upside for the ringgit.

“However, ECB’s determination to curb soaring inflation and the resumption of (Russia) Nord Stream 1 (gas) flows (to Europe) may continue to buoy the EUR (euro) above parity and benefit the ringgit,” Kenanga said.

At the time of writing, the ringgit was at 4.4525 against the US dollar after trading between 4.4505 and 4.4563 on Monday. Meanwhile, the ringgit was 4.5601 against the euro after trading between 4.5340 and 4.5648.

AmBank Group chief economist Anthony Dass wrote on Monday that he believes the bear on the ringgit is still in control even though more upwards pressure on the currency remains in the near term.

“It will still be a dollar play for now until the US narrative changes from inflation to slower growth or recession. US dollar/Malaysian ringgit of 4.50/52 levels is still on our cards in the near term,” he said, adding that attention is now focused on the Fed after the recent ECB rate hike.

Dass forecast that Bank Negara Malaysia is also likely to raise the overnight policy rate in September by 25 bps with rising nominal Gross Domestic Product (GDP), healthy labour market and the weak ringgit.

In addition, he commented that Ambank’s preliminary estimates on Generalised System of Preferences (GSP) in the second quarter of 2022 suggest between 7.5% to 8% versus the 5% in the first quarter of 2022.

In regards to inflation in Malaysia, Dass said the estimated inflation is around 12% to 13% without including government subsidies.

“Malaysia's latest CPI (consumer price index) of 3.4% year-over-year suggests cost-driven inflation remains a strong concern. Although the inflation is still low, it is mainly due to subsidies that are coming up to well above RM75 billion.

“And if we use ‘roti canai’ and ‘teh tarik’ as the basis, the underlying inflation should be around 54% to 63% from an increase of around RM1.20 to RM2,” he said.