This article first appeared in Corporate, The Edge Malaysia Weekly, on April 25 - May 1, 2016.

IN the last three months, the ringgit has made a remarkable comeback against the US dollar after its downward spiral last year that made it the worst performer among Asian currencies. From the low of 4.4 against the US dollar in early January, the ringgit strengthened to 3.88 last Thursday.

All neighbouring countries have seen their currencies appreciate against the US dollar since the beginning of this year, but Malaysia stands out as the biggest gainer so far at 9.52%. Indonesia gained 4.61%, Singapore, 4.87%, and Thailand, 2.64%.

The rapid climb of the ringgit does make some wonder if the outperformance is sustainable. Standard Chartered’s Asia foreign-exchange strategist Divya Devesh is not worried about the ringgit’s strength in the coming months. “First, investors have only turned neutral on the ringgit now from being short on it earlier. Second, from a valuation perspective, we still believe the ringgit remains undervalued. We also remain quite positive on crude oil this year. We expect crude oil prices to bounce above US$60 per barrel by year-end.”

“We have seen strong inflows into Malaysia in recent months. As a result, we believe many emerging market funds have already covered their short ringgit position and are now neutral,” he says.

Meanwhile, AmBank senior vice-president of foreign exchange research and strategy Wong Chee Seng points out that the seasonality pattern of the ringgit shows an appreciation in April each year. “It has consistently demonstrated its appreciation bias in the month of April since 2006 and it could be related to supportive seasonality of Petroliam Nasional Bhd’s dividend repatriation and quarterly portfolio rebalancing into local assets,” he explains.

Part of the reason for the ringgit’s swift decline against the US dollar last year was linked to the weakness in commodity prices. Malaysia, which is highly exposed to commodity price fluctuations, saw its currency spiralling downwards as crude oil prices fell.

Besides that, the strengthening of US economy and the uncertainties over when the US Federal Reserve would hike interest rates caused outflows of funds and depreciation in currencies within emerging markets, including Malaysia.

When asked if the situation in the external environment has stabilised, thereby reducing volatile movements in the ringgit, Wong opines that global recessionary risks have subsided in recent times. He adds that the uneven recovery in China’s economy and a clear pro-growth signal from the world’s second largest economy have been helpful in calming the fretting markets.

China recently announced a first-quarter gross domestic product growth of 6.7%, which was in line with market expectations.

“We are tactically bearish on the US dollar for now and it could be reversed on the improving US labour market, rising core inflation and pullback in implied volatility. Sentiment is likely to improve as markets readjust their expectations even though we recognise the risk that the International Monetary Fund could further downgrade its 2016 global economic growth,” adds Wong.

However, could government-owned 1Malaysia Development Bhd’s (1MDB) dispute with Abu Dhabi’s sovereign wealth fund International Petroleum Investment Company (IPIC) put a dampener on the ringgit’s performance?

Last week, IPIC announced to the London Stock Exchange that 1MDB and Minister of Finance (Incorporated) had failed to make certain payments and perform other obligations owed to the IPIC group pursuant to the debt swap agreement that the parties had signed last June.

The failure to repay a loan of US$1.1 billion means 1MDB and MoF are effectively in default, IPIC said. 1MDB responded by saying that it will meet all of its obligations under any other financing arrangements and reiterated that is has “ample liquidity” to do so.

The delay in the payment of the US$50 million interest on a US$3.5 billion bond issue has given rise to fears of cross defaults on other borrowings.

Some RM5.8 billion of 1MDB’s bonds are guaranteed by the government.

When asked if the news has impacted government bonds, a fixed income analyst says that there has been some damage, as widening bond spreads have shown.

“But the quantum is limited so far, with spreads being wider by just 5bps to 10bps on Malaysia’s USD bonds. What we hear is that the market thinks that credit-wise, this is not considered a systemic risk on the whole market.”

He adds that there has been a combination of drivers putting pressure on the market in the past week. In particular, there was a negative reaction from the Doha oil producers meeting, which saw the oil majors leaving without agreeing to output cuts. “Selected crude futures fell below US$40 per barrel and the US dollar/ringgit rose above 3.95 after that,” he says.

He is more worried over indicators such as reserves, current account, foreign exchange and commodity prices and their impact on Malaysian bonds. “For instance, between August and September last year, our dollar bond spreads widened by 40bps as the ringgit rose to 4.45 and crude oil fell below US$45 per barrel. At that time, the assumption on the government’s 2016 budget was crude oil at US$48 to US$60 per barrel. At below US$45 per barrel, our ringgit and bond yields suffered,” he explains.

Thankfully, the market rebounded, he adds. The ringgit is near 3.9 against the greenback while crude oil is hovering at US$40 per barrel.

“Malaysian government bond prices are firm and our traders have not seen much net selling pressure. For example, the 10-year government bond yield remains near 3.75%, or its best levels since February last year,” he adds.

Nevertheless, the new government Islamic debt issued last week saw the country paying a higher premium to bondholders to own it. Newswires reported that the government priced US$1 billion of 10-year notes at a wider spread than an offering a year ago. The sale attracted US$6.3 billion orders as compared with US$9 billion for an issuance of the same size last year.

However, the ringgit remained relatively stable despite the newsflow. It ranged from 3.9295 to 3.8668 during the week before closing at 3.9005 last Friday. 

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