This article first appeared in Capital, The Edge Malaysia Weekly on November 21, 2022 - November 27, 2022

THE ringgit has been in the doldrums for most of 2022 due to the strong US dollar, with the US Federal Reserve embarking on a monetary tightening policy. But the local currency has staged a strong rebound of 3.89% against the greenback this month with better-than-expected 3Q economic growth and slight easing of the US currency after a milder expansion of the US Consumer Price Index (CPI) for October.

The ringgit strengthened past the 4.60 level last week, reaching a high of 4.5465 on Tuesday from the previous Friday’s close of 4.6200. This has given the currency a much needed reprieve as it has been under pressure for a while with investors flocking to a stronger US dollar.

The last time the ringgit was above the 4.60 level was on Sept 23 at 4.5787. At 6pm last Thursday, the local currency slipped marginally to 4.5490 from Wednesday’s close of 4.5400.

“While Malaysia’s stronger-than-expected 3Q gross domestic product (GDP) growth of 14.2% year on year (y-o-y) helped to lift the ringgit against the US dollar, the US dollar index has taken a brief pause, following the better US CPI reading for October,” the Associated Chinese Chambers of Commerce and Industry of Malaysia’s Socio-Economic Research Centre (SERC) executive director Lee Heng Guie tells The Edge.

On Nov 11, Bank Negara Malaysia announced that the GDP growth of 14.2% was underpinned by continued expansion of domestic demand, a firm recovery in the labour market and income condition amid normalising economic activity and ongoing policy support.

The US Labor Department reported that the CPI had increased 7.7% y-o-y in October, down from 8.2% in September. The index had hit a high of 9.1% in June.

Market expectations are that the Fed will raise its Fed funds rate by a smaller quantum of 50 basis points in December, compared with the previous four hikes of 75bps each, says Lee. The Fed funds rate currently stands at 3.75% to 4.25%.

Christopher Waller, a member of the Federal Reserve Board of Governors, hinted on Nov 13 that the Fed would consider slowing the pace of interest rate increases at its next meeting, Reuters reported.

“We’re at a point where we can start thinking of maybe going at a slower pace, but we’re not softening. Quit paying attention to the pace and start paying attention to where the endpoint is going to be. Until we get inflation down, that endpoint is still a way out,” he said at an economic conference organised by UBS in Australia.

The US dollar index (DXY) lost 4% last week, the most significant drop since March 2020.

“Such powerful moves against the trend often signal a further trend reversal. However, it will probably be a slower pace of decline and not a one-way street as we have seen over the previous 10 days,” says Alex Kuptsikevich, a Cyprus-based senior market analyst with FxPro UK Ltd.

“This week alone, the index declined 0.19%, giving further indication that the momentum in the US dollar is decreasing.”

The pressure on the US dollar has intensified over the past two weeks on speculation that the Fed would slow the pace of policy tightening and the maximum interest rate in this monetary cycle could be lower than previously feared.

Thomas Yong, CEO of Fortress Capital Asset Management Sdn Bhd, says the ringgit’s recent strength has been due to the retracement of the US dollar.

“The US dollar has gained significantly against all major currencies since US interest rate hikes due to portfolio flows and the reversal of cheap US dollar financing that is no longer the case. Once these knee-jerk reactions are done, the demand for US dollars will revert to normal transactional demand levels,” he tells The Edge.

The DXY is currently at 106.58 points. It came off a peak of 114.10 on Sept 27 to fall to 106.20 on Nov 17.

The plunging DXY validates the view that the Fed’s monetary tightening is losing steam. However, the market will have to look out for signs of a potential inflation, cautions Juwai IQI chief economist Shan Saeed.

“If you want to fathom what is happening in the financial markets, you need to follow the debt or bond market. The bond market is cracking in the US since the Fed’s monetary policy has lost control. Inflation is likely to stay higher. If you get stability in the bond market, then stocks can go higher. Otherwise dislocation continues in the bond market. It is a classic case study of epicaricacy,” Saeed tells The Edge.

The yield of the 10-year US Treasury, a benchmark for borrowing costs, fell to 3.732% on Nov 17, which is below the Fed funds rate of 3.83%.

He adds that traders are now betting that the Fed will opt for a smaller rate increase at its next and last meeting in December, instead of the jumbo hikes of 75bps each at the last four meetings.

Despite the pessimism on the state of US inflation, Saeed says the ringgit is expected to maintain structural stability in the range of 4.10-4.35 against the US dollar, given the less hawkish stance of the Fed and higher commodity prices.

“Investors may not consider the US dollar a safe haven and will flock to other assets such as gold and silver. This will take off further edge to the dollar,” he adds.

The ringgit had been trading positively against the US dollar, but retreated last Thursday ahead of the general election on Saturday. The market was closed on Friday as Nov 18 and 19 had been declared public holidays to enable the electorate to cast their votes.

The local currency also depreciated against a basket of currencies, having fallen 0.06%, 0.11%, 0.10%, 0.07% and 0.06% against the Singapore dollar, pound sterling, euro, yen and Australian dollar respectively.

The Asian Dollar Index (ADXY), which is a spot index of emerging Asia’s most actively traded currency pairs valued against the US dollar, retreated marginally to 98.39 points last Thursday. The index was at a multi-year low of 95.72 on Nov 2 before rebounding to 99.29 on Nov 15.

The US dollar weakened against several currencies last Thursday, including the won (-0.15%), baht (-0.14%), Taiwan dollar (-0.05%), Philippine peso (-0.07%) and Singapore dollar (-0.13%). However, it appreciated against the renminbi (+0.01%) and rupiah (+0.10%).

Meanwhile, the easing of China’s stringent zero-Covid policy has improved market sentiment, according to Vincent Lau, head of equity sales at Rakuten Trade. “The move is generally cheered by financial markets, although Covid-19 cases have not really reached a desired minimum,” he observes.

On Nov 11, China eased some of its strict Covid-19 measures, including shortening the quarantine period by two days for close contacts of infected people and inbound travellers, as well as removing a penalty imposed on airlines for bringing in too many cases.

According to Lau, this will further boost optimism in the currency market after the zero-Covid policy was deemed to have crushed business activities in the world’s second largest economy. “The reopening will not only support the economic health of the country, but is likely to see the return of investor confidence,” he says.

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