A bumpy ride for the ringgit in 2016

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The ringgit endured a bumpy ride and an excruciating journey throughout 2016, no thanks to the gloomy global economy and the volatile oil prices which added to pressure in the international financial markets and back-to-back speculative foreign exchange environment.

The Malaysian currency was badly punished this year, having depreciated by 4.53 per cent to end the year at 4.4845/4875 against the US dollar compared with the 4.2900/2970 registered end of last year.

The ringgit kicked off the year lower at 4.3160/3250, extending 2015’s downside momentum over fears of a global recession, falling crude oil prices, anticipation of normalisation of interest rates in the United States as well as concerns over China’s economy.

The local unit struggled to find its equilibrium in the first quarter, suffering from the ‘yo-yo’ confidence in the global economy with interest clouded by the possibility of a US interest rate hike.

As a result, the ringgit swayed to a bearish mode of above the 4.00-level.

The oil supply glut had continuously weighed on the risk appetite for the local unit as the tumble in oil prices would negatively affect the currencies of commodity exporting countries, and Malaysia was not spared.

Oil prices, which reached a peak of US$115 per barrel in June 2014, plummeted to a 13-year low of US$26.05 per barrel on Feb 11 this year.

Nevertheless, government officials and experts strongly believed that the ringgit was significantly undervalued and did not reflect the true economy as the country was registering better-than-expected growth in the first two quarters of the year of 4.2 per cent and 4.0 per cent respectively.

Approaching the second quarter, the emergence of positive factors such as improved equity and bond markets and strong inflow of foreign funds had provided a boost for the ringgit, which outperformed its regional peers.

The local note rebounded to 3.9960/9030 against the US dollar on March 29 and stayed in the region for a few weeks.

April was the best month for the local currency following a recovery in crude oil prices which rallied more than five per cent to near the US$50 per barrel mark, the best monthly gain in seven years.

This propelled the ringgit to its nine-month high and all-time high for 2016 of 3.8660/8720 vis-à-vis the US dollar, on April 20.

Gains, however, were then slashed by fresh cautious sentiment, arising from the referendum on Britain’s exit from the European Union (EU), driving it back to above the 4.00-level in early May.

Surprisingly, the outcome of Brexit, which has raised prospects for downside risks particularly for the EU, has somewhat provided a slight upswing to the ringgit as against the British Pound.

At the start of the second half of 2016, the ringgit stabilised at 3.9960/9010 against the US dollar as Asian markets remained relatively calm post-Brexit.

Market experts felt that Brexit had amalgamated with a toxic mixture of events which had incessantly obstructed all efforts taken by the US Federal Reserve to raise interest rates this year, with the US dollar potentially exposed to losses moving forward.

Following the rising risks from Brexit, Bank Negara Malaysia (BNM) at its monetary policy committee meeting on July 13 unexpectedly cut the overnight policy rate (OPR) by 25 basis points to 3.00 per cent after keeping it unchanged at 3.25 per cent for the 11 consecutive meetings earlier.

Following the OPR reduction, the three-month KLIBOR declined 25 basis points from 3.65 per cent to 3.40 per cent.

The ringgit retreated in mid-July dampened by subdued risk appetite due to inconsistent global crude oil and commodity prices as well as domestic issues.

Momentum spiralled downward thereafter mainly weighed down by the firmer dollar due to strong US domestic demand coupled with capital inflows to the US from Japan, Europe and from other emerging economies.

In early November, the ringgit further depreciated against the US dollar as the greenback was getting stronger due to ‘Trumponomics’ and the positive energy exuded by US president-elect Donald Trump on the financial market.

Besides the ringgit, all other currencies in the region took a beating from the US dollar’s strength in the wake of Trump’s upset win.

The Japanese yen slumped to its weakest level in five months, the Australian dollar gave up two per cent, the South Korean won dipped 1.6 per cent, the Philippine peso dropped 2.7 per cent, the Singapore dollar was down 2.5 per cent and the Thai baht fell 1.5 per cent.

The Indonesian rupiah plunged more than five per cent, prompting the central bank to intervene, but surprisingly, the ringgit only lost one per cent.

Thereafter, the ringgit contracted by more than five per cent as emerging Asian economies were slapped with US$11 billion worth of fund outflows.

The selling pressure continued as the currency fell headlong to its 12-year low in the offshore markets, prompting BNM to intervene on the non-deliverable forward (NDF) trades to curb speculative activity.

The central bank told the market to ignore the NDF, but ironically it had further fuelled speculation and hurt sentiment toward the nation’s assets with the yield of the 10-year sovereign notes soaring to a 15-month high.

Despite the outflow of funds and a depressed ringgit, Governor Datuk Muhammad Ibrahim had stressed that the central bank would not peg or introduce capital controls to curtail the ringgit’s slide.

He pointed out that the ringgit’s level must be supported and dictated by the underlying transactions as contracted by the banks on a daily basis and the currency should not be determined by speculative positioning.

Meanwhile, Second Finance Minister Datuk Johari Abdul Ghani believes that the riggit peg, one of the capital controls imposed during the 1997/98 Asian financial crisis, is not practical now in an open global economy as the country will forfeit its economic growth.

On Dec 2, BNM announced several new measures to encourage more domestic trade of the ringgit, a move to “protect the interest of the real sectors and genuine investors”.

The measures have led the ringgit to a more stable level with the onshore and offshore ringgit NDF markets appearing to be converging.

The first signs emerged on Dec 2 evening as the ringgit stood at 4.45 against the US dollar on the closing of Dec 2 in the domestic market and ending at 4.44 in the offshore market.

This showed that the offshore banks were squaring off their NDF hedge positions as they slowly exited ringgit positions to avoid losses.

In a nutshell, the ringgit, along with most emerging market currencies, has experienced sharp adjustments and significant volatility in the year of 2016 due to continuing uncertainties in the global economic and policy environment as well as geopolitical developments.

The gloomy environment has forced many central banks to reduce interest rates this year, including in Malaysia, Australia, South Korea, Europe, Japan, India, Indonesia, Sweden and Switzerland, to support their domestic financial ecosystem.

Although the forex markets had factored in the possible changes in US interest rates, sentiment remained weak across the globe.

After months of jitters, on Dec 14 the US Federal Reserve finally lifted the benchmark interest rate by 25 basis points, the second time since cutting it to near-zero back in 2008.

This spooked the ringgit to its weakest level in nearly 19 years against the greenback.

On Dec 20, the ringgit touched 4.4790 at one point, the weakest level since the Asian financial crisis, and was drifting further to closed at 4.4780 against the greenback.

Selling pressure continued towards the end of December, shoving the ringgit to end 2016 at its all-time low for this year of 4.4845/4875 versus the US dollar on Dec 30, compared to 4.2900/2970 on Dec 31 last year.

ForexTime (FXTM) Vice-President of Corporate Development and Market Research Jameel Ahmad said the ringgit would be able to gradually regain some losses against the dollar once the momentum for the greenback came to a pause. — Bernama