Bank Negara may keep ringgit's ascent in check

Now that the ringgit's trade-weighted exchange rate is nearly back to its recent peak in early 2010 this would prompt Bank Negara to intervene more in the risk-on environment, says an economist


THE ringgit, which has outperformed most Asian currencies so far this year, may be kept in check by the central bank.

Bank Negara Malaysia (BNM) might have allowed more ringgit appreciation this year, given that the current account surplus remains strong, domestic demand is resilient, the signs of a pick-up in US economic activity as well as benefits from the higher oil prices.

But now that the ringgit's trade-weighted exchange rate is nearly back to its recent peak in early 2010 this would prompt BNM to intervene more in the risk-on environment, said Credit Suisse economist Santitarn Sathirathai.

His forex strategist colleagues said that BNM would want to see the manufacturing and export sector growth recover from the currently weak levels and that having a currency which continues to outperform would not help.

They said the general election, expected in the third quarter, may also present a significant event risk.

They felt that the recent robust gross domestic product growth had come largely from a temporary bunching of government spending into the second half of 2011, which is offsetting deterioration in net exports.

Credit Suisse expects the Asian foreign exchange market to be at risk of some further weakness against the US dollar over the few months.

"Asia's growth recovery has not been strong enough to instil investors confidence and global PMIs (Purchasing Managers' Index) are pointing to a moderation in the second quarter."

Slowing growth in China and market concerns about Spain and Italy continue to dominate market pricing of foreign exchange in emerging Asian economies.

The recent divergence between emerging market Asian equities and that of US is one reflection of this, leading to a reversal in equity flows and weakness in regional currencies.

The Philippines, Singapore, and Malaysia are experiencing a boost from the external sector coming from the recovery in the global electronics industry, and Malaysia and Thailand are also benefiting from aggressive fiscal stimulus.

The US recovery looks robust, even if it remains inadequate, particularly now that petrol prices have begun to fall. Asian exports are growing and the region's giants, China and India, have begun easing their monetary policy.

It said the European Central Bank may prove slow, but Credit Suisse expects the central bank to respond to rising financial stress in Spain and disappointing European growth with further policy easing.

This, said Credit Suisse, should lead to a stronger recovery in the second half of the year.

On the monetary policy stance, Sathirathai said BNM will keep the policy rate unchanged at three per cent for the rest of the year, barring an eurozone financial crisis or other major adverse growth shocks.

With inflation likely to fall to as low as two per cent by mid-2012, it has room to cut the policy rate if needed.

On the Malaysian economy, Credit Suisse has maintained its 4.8 per cent growth for this year.