Short-term ringgit volatility expected on Fed hike rate

by **Cals** Mon 23 Nov 2015, 22:05

Short-term ringgit volatility expected on Fed hike rate

By Tan Siew Mung / The Edge Financial Daily | November 23, 2015 : 10:08 AM MYT

This article first appeared in The Edge Financial Daily, on November 23, 2015.

KUALA LUMPUR: [size=16]Standard Chartered expects the Federal Reserve (Fed) to raise its rates by 25 basis points at its December meeting, which may put some short-term downward pressure on the ringgit.

Standard Chartered chief investment strategist Steve Brice told The Edge Financial Daily after a media briefing on currency outlook that it would take either a significant weakening of the US economic data or significant market volatility to deter a move away from zero interest rate. Hence, he sees a hike in the Fed fund rate in December.

“We may see some short-term volatility after the rate hike. However, we expect this to be temporary and probably smaller than, which has been the case historically. As the move is probably the most anticipated rate hike in history.

“This may put some short-term downward pressure on the ringgit, but a lot of the interest rate hiking cycle is probably priced in already,” he said.

However, Brice opined that fundamentally, the ringgit looks weak and he expects it to trade in line with other Asian currencies, weakening 3% to 5% in the next three to six months before stabilising.

Firstly, Malaysia’s trade balance has edged lower following the collapse in commodity prices, and commodities account for approximately 20% of Malaysia’s total exports.

“We remain bearish on oil prices in the short term. There is still significant excess capacity — approximately one million barrels per day,” he said, adding that further downside for oil prices over the next six months will continue to pressure the ringgit.

Secondly, Malaysia’s balance of payments position is noticeably weaker.

“In general, portfolio and direct investment outflows have increased; current account surplus lowered compared to previous years,” he added.

Thirdly, as the Fed raise its rates, capital outflows from Asia-ex-Japan are likely to continue, and the ringgit has generally followed capital outflows.

“Since 40% of local bond market is still owned by foreigners, investors may continue to see foreigners reduce holdings of Malaysian debt, which would put downward pressures on the ringgit.”

Fourthly, Malaysia’s deposit rates are not providing much fundamental support.

“One-year deposit rates in Malaysia are around 3.5% to 3.6%, with inflation which is expected to go up to 3% next year, the real deposit rates are fairly low and not attractive,” Brice said.

Brice is also of the view that Malaysia’s foreign exchange reserves do not provide sufficient coverage to short-term external debt.

“Although forex reserves at six times imports are adequate, but they only just cover outstanding short-term external debt,” he said.

Having said that, as much of the bad news has been priced in, Brice does not expect the ringgit to reach the low level of 4.80 to 5.00 against the greenback.

Meanwhile, the case for further US dollar strength remains intact for now, despite slight narrowing of interest rate differentials have resulted in the US dollar being weak recently, he said.

Brice said he believes the dollar strength will continue over the next few months, but it is not likely to be as strong as in the last two years.

On the Malaysian economy, Standard Chartered is expecting modest growth of 5.3% next year, with inflation averaging at 3%, which should allow interest rates to remain on hold through 2016.

“The external backdrop remains quite challenging with China in a structural slowdown, while the US economy may disappoint slightly. That said, we do not expect a global recession and this should allow domestic growth to remain relatively healthy, especially should oil prices pick up as expected,” Brice highlighted.

“US production has started to correct lower in response to reduced profitability. We expect these production cuts to continue and together with a gradual recovery in demand in 2016, this may put the oil market closer to demand-supply balance, which may allow oil prices to recover on a 12-month basis,” he said.
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