Highlight Ringgit bottoming out, likely to rebound in 2016

by **Cals** Sun 03 Jan 2016, 16:06

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[size=28]Ringgit bottoming out, likely to rebound in 2016

By Ahmad Naqib Idris / The Edge Financial Daily | December 31, 2015 : 8:44 AM MYT

This article first appeared in The Edge Financial Daily, on December 31, 2015.
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KUALA LUMPUR: The fall in the value of the ringgit, which is Asia’s worst-performing currency this year, may have hit bottom, economists said, expecting the local currency’s decline to reverse next year.
On the bullish end of forecasters is MIDF Research, which viewed yesterday’s news on Kumpulan Wang Persaraan (Diperbadankan) (KWAP) planning a £270 million (RM1.72 billion) sale of an office building in central London as an indication of the market’s perception that the ringgit is bottoming.
“Local funds repatriating their capital to Malaysia are taking advantage of the ringgit’s weakness to realise their currency translation gains. Despite the fact that oil price continues its downtrend particularly since the Organization of the Petroleum Exporting Countries meeting last November, there is little change to the ringgit,” the research firm said in a note to clients yesterday.
“It seems that the ringgit is no longer responding to the price of oil and commodity, as if the relationship between the two has diminished,” it added.
“Furthermore, the ringgit is even going against the capital flow where despite there (being) a continuous net selling by foreign investors in Malaysian equity market this month, there is almost no change in the local currency,” MIDF Research noted.
Combined with the fact that the onshore-offshore spread of the ringgit has been consistently in the negative territory since the middle of December, which reflects that there exists an upward pressure on the ringgit, the research firm believes that the ringgit downtrend is bottoming and it will begin to rebound in 2016.
For Malaysian Rating Corp Bhd (MARC), it is of the view that downside pressure on the ringgit remains in 2016, at least in the first half of the year (1H16).
“This view is premised on the anticipated continuing slide in crude oil prices in 1H16 as supply outstrips demand. The ringgit’s positive relationship with crude oil prices remains tight with an r-squared of 76% between December 2012 and November 2015,” it said in a report on Tuesday.
The r-squared value of 76% means that 76% of the movement of the ringgit can be explained by the movement in the oil price.
MARC noted that the ringgit has not only declined against the greenback, but also against currencies of major trading partners, with the nominal effective exchange rate dropping by 15% since the end of 2014. On a real effective exchange rate basis, the ringgit fell by 14% during the same period.
“Notwithstanding this, while regionally the ringgit’s performance looks dismal, its depreciation against the greenback has been generally less than currencies of other commodity-based economies.
“For instance, since July 2011, the ringgit weakened by 30.3% against the US dollar, less than currencies like the Brazilian real, Indonesian rupiah and Australian dollar, which depreciated by 59.9%, 38.6% and 34.3% respectively during that period,” said MARC.
“Looking at it from that perspective, ringgit weakness should not be considered as an isolated case,” it added.
Other factors that may cap the upside of the ringgit in the near term include limited prospects of an overnight policy rate hike amid weak economic conditions, prospects of outflows of portfolio capital in view of further rate hikes in the US, and possible further devaluation of the Chinese yuan.
Recent developments in the commodity market are also negative for the ringgit.
MARC said the sentiment on the ringgit will improve if crude oil prices start to stabilise, possibly by the middle of 2016.
“In addition, if the 2004-2006 US rate hike scenario unfolds where investors have more or less priced in prior to the rate hike, the greenback may weaken across the board, benefiting the ringgit.
“Based on the past relationship between the ringgit and oil prices, and assuming a slight recovery of global crude oil prices, we foresee an average Brent price of US$40-$50 per barrel to be consistent with the ringgit-US dollar exchange rate of roughly 3.95-4.15,” it added.
According to Bloomberg, the ringgit closed 0.07% higher at 4.2913 against the US dollar yesterday.
Meanwhile, Brent crude fell 26% to US$37.41 per barrel since Nov 2, while West Texas Intermediate crude declined 22% to US$37.20 per barrel.
Affin Hwang Capital chief economist Alan Tan sees a gradual recovery in the ringgit, to eventually trade below 3.95 against the greenback by the end of next year, from an end-2015 forecast of 4.3.
While the ringgit has been pressured by low oil prices, which in turn impacted Malaysia’s foreign-exchange reserves, Tan expects the country’s sustained current account surplus to provide some buffer to the reserves level.
He expects Malaysia’s current account to remain in surplus, albeit narrower at RM12.9 billion in 2016, from RM28 billion this year.
“With good domestic economic fundamentals, as reflected in healthy current account surpluses together with stable international reserves, the ringgit should appreciate gradually against the US dollar. We see the ringgit trading at below 3.95 against the US dollar by end-2016,” Tan told The Edge Financial Daily yesterday.
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