August 21, 2015
The ringgit has taken more than its fair share of beatings this month, weakening past the 4.0 level against the greenback and some analysts are predicting that it will hit the 4.2 level. Tiger thinks that the currency desperately needs a reprieve and believes that it may happen, though not as soon as she would like.
“Desperation is like stealing from the Mafia: you stand a good chance of attracting the wrong attention.” – Douglas Horton
A special trait that all Tigers have is the ability to sniff out desperation kilometres away from the source, which is usually an unfit kijang struggling to get away or a human being desperately climbing a tree to avoid being eaten by yours truly and the rest of her kind.
But the desperation of the worst kind is when it comes from panicking investors – in this case, those heedlessly fleeing from the weak ringgit. Tiger thinks in some ways they are unjustified and believes that there could be a reprieve in sight for the ringgit, if a confluence of factors take place sooner rather than later.
More clarity needed from the Fed
Economists and analysts have suggested that the fate of the ringgit appears tied to the decision of the US Federal Reserve in relation to an interest rate hike. This means that if a hike were to occur, it would further strengthen the already-strong US dollar and thus weaken emerging market currencies, including the ringgit.
However, Reuters reported on Aug 21 that the minutes from the July 28-29 meeting of the Federal Open Market Committee showed just one panel member as ready to raise rates. “Others acknowledged that improving labour markets and other necessary economic conditions were falling into place for the first US rate hike in nearly a decade, according to the minutes,” the report said.
The report also cited experts saying that the minutes do not give a clear view of whether the Fed will hike rates in September. Given that US inflation is low (the latest rate is 0.2%) and that growth is returning to the country (its second quarter gross domestic product expanded 2.3% over the previous quarter), the Fed may not want to risk US exports by allowing the US dollar to strengthen further.
US Federal ReserveIf the Fed does postpone a rate hike, this will allow the US dollar to drop and, as a result, allow emerging market currencies like the ringgit to strengthen. However, the market has already priced in a rate hike, thus leading to the continued weakening of the ringgit. Until more clarity comes from the Fed, Tiger thinks the ringgit will continue its slide.
Commodity price rout set to continue
Economists Tiger spoke to recently were of the opinion that as long as the rout in commodity prices (particularly crude oil) continues, the ringgit will continue to weaken. WTI crude oil prices dipped below US$41 per barrel on Wednesday to US$40.80, a six-year low, on the latest sign of a glut in crude supplies, said a Wall Street Journal report on the same day.
An economist told Tiger recently that the oversupply of crude oil is likely to continue due to OPEC countries continuing to produce oil despite the continuous decline in prices. When asked by Tiger how low oil prices will go, the economist refused to say more, save that oil prices will continue to decline well into the second half of the year. As long as commodity prices continue to fall, so will the ringgit.
Capital outflows and foreign reserves
Tiger acknowledges that Malaysia’s foreign reserves have fallen below the US$100 billion mark and that capital outflows is the culprit. However, she would like to remind investors that the outflows are possibly due to money flowing out of the country back to the developed markets, which are showing signs of recovery. Tiger knows that this is in stark contrast to the more popular theory that the foreign reserves are falling because the central bank is taking measures to defend the currency.
What cannot be denied however is that capital is flowing out of the equity and debt markets as investors take positions on the ringgit. Some analysts have said that due to declining foreign reserves, they expect the central bank to avoid defending the ringgit and instead try to contain volatility. Tiger couldn’t agree more.
Political uncertainty needs resolving
Speak to any analyst or economist in the know and you’ll get told that the political uncertainty in the country is currently weighing on investors and influencing them to take positions on the ringgit (or in other words, flee from the currency).
Political stability is reassuring to investors; however, the current political situation in Malaysia does not inspire investor confidence, leading them to pull out of the equity and debt markets. This problem is being faced by Indonesia as well, whose rupiah has been performing nearly as badly as the ringgit.
Of course it doesn’t help that the still-at-large elephant in the room has not been reined in. Tiger is talking about none other than 1Malaysia Development Bhd (1MDB), which is at the centre of a nationwide scandal. The controversy and negativity surrounding 1MDB is not going to magically disappear; what investors are looking for is a swift resolution to it and to the political uncertainty.
The longer the political situation and 1MDB issues take to get resolved, the weaker the ringgit will get, in Tiger’s opinion.
To sum it up, a combination of external and internal drivers need to come together to restore the ringgit’s former glory (if you can call it that). The factors outlined above are just too crucial for investors to ignore, and Tiger hopes the central bank and powers-that-be will take heed before the ringgit spirals out of control. Because like it or not, investors are desperate for a resolution and, as a result, the ringgit is at their mercy.