Ringgit fundamentally oversold, says UOB Research

by **Cals** Tue 11 Aug 2015, 17:23

Ringgit fundamentally oversold, says UOB Research

KUALA LUMPUR (Aug 11): The ringgit is fundamentally oversold at its current levels although the near-term outlook for the US dollar versus the ringgit is weighed down by a lack of fresh catalysts and overriding negative sentiment, according to UOB Global Economics & Markets Research (UOB Research).
In a note today, the research unit said should oil and commodity prices stabilise back at higher levels, that would open the door for a ringgit rebound.
It said the passage of repatriation of government-linked funds from abroad may also provide some buffer for the currency.
Commenting on Bank Negara Malaysia (BNM)'s foreign reserves, it said foreign reserves fell by US$8.8 billion to US$96.7 billion in July (versus minus US$0.9 billion in June).
It said the current reserves level is sufficient to finance 7.6 months of retained imports and is 1.1 times the redefined short-term external debt.
"The fall in reserves reflects central bank efforts to [smooth] out excessive volatility as several external and domestic factors weigh on the ringgit," it said.
UOB Research said that in recent years the level of reserves had fallen to a low of US$87 billion in mid-June 2009, at which point the ringgit traded at 3.50 per US dollar.
"The rule of thumb for an optimal level of reserves should cover at least five months of import payments.
"We think Malaysia continues to have sufficient reserve adequacy even after drawing down US$19.3 billion of reserves (versus minus US$18.9 billion in 2014).
"In sharp contrast to the 1997/98 Asian Financial Crisis, Malaysia only had US$20 billion of reserves (equivalent to 3.2 months of retained imports and 1.4 times of short-term external debt) when the US dollar-ringgit hit an intraday high of 4.885 on January 7, 1998," it said.
UOB Research said the ringgit had fallen to 3.95 per US dollar and depreciated 11% year-to-date.
It said based on the spike in risk reversal, market players were betting on a further run in the dollar against the ringgit.
"We do not think BNM is targeting any specific level of foreign reserves and will continue to intervene to manage the volatility.
"We see selling of the ringgit on several fronts — foreigners were selling Malaysian Government Securities (MGS)(likely on the shorter end), foreigners were net sellers of Malaysian equities for 14 straight weeks to the tune of RM3 billion in July, and importers who were previously unhedged may have started to buy dollars in anticipation of a further run up in the currency," it said.
Meanwhile exporters who have repatriated proceeds prefer to hold the dollar.
UOB Research said foreign holdings of MGS inched down to 47.8% in July from a two-year high of 48.5% in June.
"Every 1% decline in foreign holdings of MGS is equivalent to net foreign selling of around RM3.5 billion," it said