Ringgit to maintain strength against US dollar despite weakness in May

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KUCHING: While moving generally weaker against major currencies last month, the ringgit should be able to maintain its strong trade against the US dollar throughout the year, says an economist.

In May, the local currency slipped against major currencies namely the euro, UK pound sterling and US dollar, with decline rates ranging between one to four per cent. However, it fared favourably against most regional currencies specifically the Chinese yuan, Indonesian rupiah, Japanese yen, Thai baht and Filipino peso – ranging advancement of between 0.3 and 1.2 per cent.

Patricia Oh from TA Securities Holdings Bhd noted that during the month, the ringgit had averaged at RM3.0157 per US dollar.

“Take note that the currency had closed strongest against greenback at RM2.9610 per US dollar on April 29 – last seen in October 1997 – owing to the continued inflow of funds and sustainable trade surplus,” she said in an online commentary.

Conversely, the local denominator posted a constant trading performance against the greenback as of date, moving averagely at RM3.0331 per US dollar throughout.

“It will continue to trade strongly against the greenback in 2011 backed by a combination of factors; including our expectations for further normalisation of the Overnight Policy Rate (OPR) to 3.5 per cent by year-end, healthy reserves level held at Bank Negara, boost in sentiments as a result of the strong fundamentals of the economy, as well as regional economic rebound and impositions of capital and financial controls.

 

 

“Another notable factor is the US Federal Reserve maintaining its benchmark interest rate at record low for an extended period.”

Notwithstanding this, Oh believed that for Malaysia, the economy would continue to be backed by growth in domestic segments, continued inflows of funds and sustainable trade surplus.

“In the year’s first quarter, statistical figures showed continued inflow of funds into Malaysia, with balance of payment had registered a surplus totalling RM15.9 billion during the period driven mostly by the current account segment.

“Total FDI (foreign direct investment) had also improved by 176 per cent year-on-year amounting to RM11.1 billion during the first quarter. In the meantime, international reserves held by Bank Negara grew by a cumulative 22.2 per cent in ringgit terms totalling RM401.4 billion as at May 2011.

“Our year-end exchange projection for the ringgit is retained at RM2.80 per US dollar,” the economist highlighted.

Meanwhile, Oh mentioned that apart from Malaysia, inflows of fund should also benefit the other Asean-Five currencies (Indonesian rupiah, Thai Baht, Filipino peso and Vietnamese dong).

“The Asean-Five currencies have been relatively strong against the US dollar as at May 2011, given their economic fundamentals in place and prospects for continued growth within the region. Amongst all, the rupiah has appreciated the fastest by almost five per cent to date.”

 

Oh also stated, “For exports oriented economies including the Asean-Five, international trade segments of imports and exports rely heavily on each other. We note that both the exports and imports for all Asean-Five countries are highly positively correlated.”

Specifically for Indonesia, Malaysia, Thailand and Philippines, Oh said strong imports would correlate with strong domestic currencies, to which she added, “Hence, exports also benefit as a result of its high dependence on imports for intermediate goods. Cheaper imports translate into lower input cost as well.”

Historically, most Asian currencies had suffered from a steep depreciation following the 2008 housing bubble crisis, which had sweeping impact on income distribution, rising cost for imported goods, inflationary risk and reduction of real incomes.

Taking on to a slightly different issue, Oh believed that there would a fixed exchange rate regime to combat inflation within the Southeast Asian bloc.

“Symmetrically, the Asean-Five central banks may adopt fixed exchange rate as a nominal anchor for the economy to keep inflation under control, compelling domestic producer to face tougher competition as soon as they decide to increase prices or accept to pay higher wages.

Meanwhile, an exchange rate devaluation – or depreciation – would give rise to inflationary pressures as imported good become more expensive both to the direct consumer and domestic producer,” she opined.

“In reaction to actual and anticipated inflationary risk, these central banks may send recessionary impulse through monetary policy tightening and interest rate increase,” she added.

While the Asean-Five currencies had been positively correlated with the consumer price indexes (CPIs), the whole repercussions on the fixed exchange rate would not be as straightforward as many would think. Oh outlined that basically, the rise in purchasing power through strengthening currency would be partly offset by the rise in inflation.

“Overall domestic consumption probably improves in tandem with the higher purchasing power and that gives rise to inflation,” she explained. “On the other hand, a fixed exchange rate could bring adverse effect in terms of investment inflows and international trade. Additionally, the unpredictable inflation and increased instability in terms of exchange prices will also prevail,” she countered.