KUALA LUMPUR (July 13): Standard Chartered Bank (StanChart) Malaysia said on Wednesday (July 13, 2022) Malaysia's improving terms of trade for its imports and exports augur well for the longer-term view of the ringgit, especially against the backdrop of China's reopening from its Covid-19-driven lockdowns, due to China being one of Malaysia's largest export destinations.
"You see the balance of trade or terms of trade for Malaysia import-export has been improving very significantly in the last decade. The terms of trade improvements definitely support the longer-term ringgit view.
"Especially now that with China reopening and bouncing back, [that] should underpin ringgit strength eventually over the medium and longer [term]," StanChart head of managed investments and product management Danny Chang said at a virtual press conference in conjunction with StanChart's global market outlook briefing.
At 1pm on Wednesday (July 13, 2022), the ringgit weakened 0.14% against the US dollar to 4.4335.
Over the past 52 weeks, the exchange rate was between 4.1300 and 4.4395.
The ringgit has weakened against a strengthening US dollar due to demand for US dollar-denominated assets in anticipation of US interest rate hikes to fight inflation.
At 1.16pm on Wednesday, the US Dollar Index, which measures the value of the US dollar versus a basket of global currencies, rose 0.12% to 108.197.
Chang said the main reason behind the weakening ringgit against the US dollar is the narrowing US-Malaysia interest rate differential in anticipation of US interest rate hikes.
He said the narrowing differential between the US and Malaysia interest rates and bond yields have lent support to the US dollar.
"Historically, the differential between 10-year US government bonds and 10-year Malaysian government bonds has been well over 2%, in excess [of] 200 basis points, [but] that has almost halved to 100 basis points today.
"So, that narrowing of the differential between the two reflects the expectations of inflation and interest rate. So, I think in the shorter term, the scenario is that the continuity of [monetary] tightening [interest rate hikes] in the US would likely to continue," he said.
As such, he said StanChart expects the US dollar's strengthening to continue in the near term.
StanChart, however, expects the US dollar to weaken in the long term.
StanChart head of asset allocation and thematic strategy Audrey Goh, who was also at the virtual press conference, said that while in the shorter term, the US dollar may strengthen in view of continued US Federal Reserve (Fed) hawkish stance on interest rates and reducing US dollar liquidity, she noted that factors pointing towards a weaker US dollar over a 12-month horizon have not changed.
"Our view from a US dollar perspective, the factors supporting a weaker US dollar have not really changed. US dollar from a valuation standpoint is still quite expensive and expectations for a Fed rate hike have largely been priced into the [US] dollar.
"The relative difference between the interest rates or the [bond] yield differential will continue to turn against the [US] dollar and on the back of that, how much higher can the US dollar go over the longer term?" she said.