Ringgit hits new 13-year high

KUALA LUMPUR: The Malaysian ringgit hit a new 13-year high of 3.0345 in intra-day trading yesterday before ending trade at 3.036 against the US dollar.

A local wire service quoted a currency trader as saying the new high was driven by speculation that Asian central banks may raise interest rates to curb inflationary pressures and the continued demand for the local currency.

An Ambank Group report said yesterday that the ringgit's strength was precipitated by stronger-than-expected December export data, as manufacturers shipped more palm oil and petroleum products to customers in South-East Asia and Japan.

'Sentiment still points to stronger ringgit'

The ringgit is likely to trade within a narrow range against the US dollar next week with traders squaring off positions in the holiday-shortened week.

"Traders are short covering but sentiment still points towards a stronger ringgit," a dealer said.

The foreign exchange market will only trade on Monday and Wednesday next week as the market will be closed for the rest of the days in the week for the Federal Territory and Chinese New Year holidays.

On Thursday, Bank Negara Malaysia maintained its overnight policy rate (OPR) at 2.75 per cent at its first Monetary Policy Committee (MPC) meeting for the year.

It cited cooling inflation for the unchanged rate but hinted that it may consider additional policy tools to avoid the risks of macroeconomic and financial imbalances.

On a Friday-to-Friday basis, the ringgit was higher against the US dollar at 3.0540/0570 from 3.0580/0620 previously, dipped against the Singapore dollar to 2.3835/3877 on Friday compared with 2.3819/3852 last week.

It was higher against the Japanese yen at 3.6947/6992 from 3.6806/6860 previously and against the British pound at 4.8491/8554 from 4.8705/8756 last Friday.

The local unit was also weaker against the Euro at 4.1858/1902 on Friday compared with 4.1471/1515 previously. -- Bernama

Ringgit, government bond yields up on rates hike

KUALA LUMPUR: The hike in interest rates, which the market now expects to be the last for the year, drove the ringgit up and saw a rise in yields of short-term government bonds.

The ringgit appreciated against the dollar yesterday following the 25-basis-point rise in Bank Negara’s overnight policy rate (OPR) to 2.75%, with traders now expecting the local currency to continue to strengthen in the short term.

CIMB Investment Bank regional rates and foreign exchange strategist Suresh Kumar Ramanathan said the ringgit, which rose to 3.19 against the dollar yesterday, was pointing towards further strengthening.

He said the hike in interest rates made the ringgit an interesting carry-trade proposition for traders.

“Interest rates are pretty high to attract more capital flows into the market,’’ he said.

The monetary policy statement on Thursday was dissected by the market and the general consensus is that Bank Negara would most likely stand still now after raising domestic interest rates by 75 basis points this year.

Analysts said the previous statement, which alluded to further normalisation of interest rates, was omitted this time around.

They said this was replaced by a fresh stance whereby the Monetary Policy Committee (MPC) now considered the new level of the OPR to be appropriate and consistent with the current assessment of growth and inflation prospects.

“Taken together, these signals suggest that rate hikes are unlikely to come through in the future,’’ said Barclays Capital in a note yesterday.

“It appears that Bank Negara has created enough monetary policy buffer to respond to any downside risks.”

While the MPC’s assessment is for the global recovery to continue, it noted that there was increased risk that the global growth momentum could moderate.

But it pointed out that for the domestic economy, recent trends in key economic indicators such as industrial production, financing activity, labour market and external trade showed that economic activity had remained robust in the second quarter.

“While external developments may result in some moderation in the pace of growth, the domestic economy is expected to remain strong with continued improvement in private consumption and investment, and augmented by public investment spending,’’ MPC said.

Barclays Capital said the statement noted that recent economic indicators and trends would remain strong despite the recent gains in the ringgit. “This suggests that they are comfortable with the recent normalisation in the currency and would not stand in the way of further appreciation, provided this is fundamentally dictated,’’ it said.

RAM Holdings Bhd chief economist Dr Yeah Kim Leng believes the strong domestic economic indicators might have pipped Bank Negara’s decision to let interest rates go up for the third time.

The market was divided over the prospects for such a hike, given the economic situation globally.

“The central bank is confident that domestic growth momentum can be sustained despite the slowdown in the second half-year in the European Union economies,” Yeah said.

Although the current level was still below the historical average, Yeah called it the “new normal” considering the benign inflationary concerns and the weak economic condition globally.

He felt that the hike was important to nip asset price inflation, especially in the property sector which was driven by super-low interest rates, before it got out of hand.

“The double-digit increase in some property segments is of some concern,’’ he said.

While households have seen a debt build-up in recent years to levels considered high for Malaysia, Yeah said the current level of interest rates was seen as a balance between what households could shoulder and what the business sector found it could live with.

“It’s a fine line. We believe this level will stay for the rest of the year,” he said.

Should interest rates plateau at this level, Maybank Investment Bank head of debt capital markets Michael Oh-Lau said the rally in the bond market, which had seen yields dropping as a result of foreign buying of Malaysian Government Securities, should continue.

The impact on the bond market is expected to be positive but Oh-Lau said one risk that could emerge from interest rates remaining stagnant was a rotation of money out of the Malaysian capital markets to other countries that had not raised their rates. “There might be some risk of the exit of foreign investors if this is the last hike,’’ he said.

With interest rates now projected to remain firm for the rest of the year, analysts said all eyes would now be on the yuan and its movement against major currencies.

“The ringgit is seen as a close proxy to the yuan and further strengthening of the ringgit will come from the pace of strengthening of the yuan,” said Yeah. “This will fit in nicely for Malaysia getting a slower pace of strengthening.’’

Ringgit's direction to be set by euro

The euro's movement is largely expected to dictate the direction of the ringgit next week, a dealer said.

In the week just ended, most rivals of the greenback gained, after the euro rebounded on Thursday, despite nervousness in the market pertaining to the eurozone debt woes.

The firmer euro was supported by advances in equity markets and a denial by Chinese authorities that they are reviewing their holdings of the eurozone debt.

It was reported that China is reviewing its eurozone bond holdings because of growing concerns over gaping deficits in countries, including Greece and Portugal.

"There has been a lot of concern in recent weeks. However, the Euro-zone debt woes and rising tensions between North and South Korea, appear to cool down on Thursday," he said, adding that, the scenario spurred hope for economy
recovery.

"However, anything happening in the euro-zone and Korea would continue to set the direction of the forex market," he added.

On Thursday, the ringgit was firmer against the dollar, with investors short-covering higher-yielding currencies, ahead of a long market holiday.

The market was closed on Friday for the Wesak celebrations.

The ringgit on Thursday strengthened to 3.2940/29800 against the dollar from last Friday's 3.3180/3230.

It went up against the Singapore dollar to 2.3417/3470 from 2.3534/3603 and against the Japanese yen to 3.6486/6539 from 3.6858/6918 previously.

The local unit was also stronger against the pound sterling to 4.7687/7762 from 4.7802/7881 last week and the euro at 4.0352/0407 from 4.1488/1561 previously.-- Bernama

Najib: It shows our fundamentals are strong

KUALA LUMPUR: Most Malay-sians welcome a strong currency as it reflects the country's strong economic fundamentals and a robust recovery, Prime Minister Datuk Seri Najib Tun Razak told international financiers here yesterday.

“It is a movement in a positive sense. Generally, it is good for us,” Najib said during a question-and-answer session with delegates of the Official Monetary and Financial Institutions Forum (OMFIF) inaugural meeting in Asia.

At the meeting themed “Asia's Role in the World Economy - the New Global Financial and Economic Order,” he was asked to comment on the ringgit's strong performance especially against the US dollar, pound and euro.

Najib, who is also Finance Minister, said a strong currency also reflected the fact that Malaysian exports had been doing very well.

The economy recorded 10.1% growth in the first quarter of this year, which was the highest quarterly growth in a decade.

The ringgit is Asia's best-performing currency this year, as foreign money has poured into domestic capital markets due to a combination of strong economic growth and rising interest rates.

Year-to-date, the ringgit has appreciated by about 6% against the US dollar, 19% against the euro and 16% compared with the pound.

In his address earlier, Najib also said the challenges that arose from the international financial crisis presented an opportunity for Asia and the West to work together to find solutions that benefited all.

“Malaysia's unfolding economic story is a part of what is taking place in Asia. While Asia is indeed diverse, we are bound together by the common desire to transform and uplift our economies individually, which in turn will reinforce the region's economic and financial integration in the New World Order,” he added.

“We are looking beyond Asean. We are also looking at how to get the United States and Russia on board. We want a stronger bridge in Europe and believe in open integration,” he added.

Najib, who briefed the delegates on the 1Malaysia concept, New Economic Model and Government Transformation Programme, said people were seeking effective governance where economic growth was inclusive and beneficial for all.

On how to survive the economic crisis, Bank Negara Governor Tan Sri Dr Zeti Akhtar Aziz said Asia's resilience, including Malaysia's, was a result of a decade of reform.

Currency strength boosts confidence

PETALING JAYA: The stronger ringgit is bringing cheer to Malaysians eager to squeeze more from their money. In the travel industry, operators are expecting a boom in business because many will want to cash in on the chance to see the world for less.

“And with low-cost carriers offering so many destinations, people will tend to travel more at a relatively cheaper cost,” said Malaysian Association of Tour and Travel Agents (Matta) president Datuk Mohd Khalid Harun.

He recalled that when the Australian dollar was selling at a lower rate (RM2.50 to the dollar) a few years back, there was a big shift of Malaysians going there.

However, he reminded travellers always to get value for their money, because the cheapest travel need not mean the most enjoyable experience.

Writer Foong Chee Yan, 23, who will be going on a business trip to England, was happy he would be spending less during his trip.

Parents with children studying overseas are also happy with the stronger ringgit.

Peter Yoong, 49, a residential manager, said his eldest son would be leaving for his Computer Science studies in Oklahoma in August.

He expected to pay US$12,000 (RM38,700) in fees annually. In March, Yoong said the exchange rate was RM3.30 to the dollar.

“Now, the rate is at RM3.20. There is definitely some savings here,” he said.

Ringgit set to trend higher

The ringgit is expected to trend higher against the US dollar next week on strong interest by investors to put their funds back into the currency to get better returns.

Dealers said the near-term outlook for the ringgit was bright due to steady commercial demand from Malaysian and foreign investors as the economy was performing well.

"The ringgit will move between 3.18 and 3.17 against the greenback next week," one of them said.

Investors' appetite for riskier assets might increase and this would in turn help boost the ringgit, said RHB Bank forex dealer Badeeudin Mohd Abu Bakar.

Uncertainties in the euro zone could also set the tone for the dollar, he added.

This week, the ringgit rose against the greenback and other major currencies on expectations of better growth for Malaysia and a hike in interest rates.

On Thursday, Prime Minister Datuk Seri Najib Tun Razak said the country's economy expanded by a superlative 10.1 per cent in the first quarter as against the 4.4 per cent registered in the previous quarter.

Meanwhile, Bank Negara Malaysia, at its Monetary Policy Committee on the same day, raised the Overnight Policy Rate by 25 basis points to 2.50 per cent.

The ringgit ended the week at 3.1835/1860 against the dollar compared with 3.2560/2590 a week earlier.

It also strengthened against the Singapore dollar to 2.3079/3160 from 2.3361/3416, the Japanese yen to 3.4457/4511 from 3.4716/4759, the British pound to 4.6424/6477 from 4.9009/9061 and the euro to 3.9818/9865 from 4.1582/1624. -- Bernama

Ringgit rising

The ringgit has been strengthening against most of the world’s major currencies since early this year. But will this trend sustain?

ZAINAL Azhar has been shopping for the best rates to swap ringgit for euros for his upcoming business trip to Germany. The 40-year-old businessman from Kuala Lumpur says he has been buying euros in phases in preparation for the visit next month.

His friends, Susan Lee and Albert John, are also watching how the ringgit is faring against other currencies. Lee, a financial analyst in her 30s, has been waiting for months to score a “cheaper” vacation to the United States, while sixtysomething John is sending his youngest son to Britain for further studies.

The trio are hoping to get the most bang for their bucks when they exchange their ringgit for other currencies.

So, the recent rise of the ringgit bodes well for individuals like them – not to mention for those who like to shop online for overseas products. Since early this year, the ringgit has been strengthening against most of the world’s major currencies.

On nominal terms, the ringgit has appreciated about 6.7% year-to-date against the US dollar. The ringgit is now hovering at a two-year high against the greenback at 3.19, compared with 3.42 at the start of the year, and last year’s peak of 3.72 recorded in March.

Against the British pounds, the ringgit has strengthened from 5.5 early this year to around 4.9 currently. The ringgit has also risen against the euro from 4.88 early this year to about 4.28 currently.

Against the yuan, the ringgit has reached almost a two-year high over the week to 46.79 sen from 50.15 sen early this year, while against the yen, the ringgit has appreciated 6.9% year-to-date and 8.6% year-on-year to hover around 3.749 per 100 yen.

Other regional currencies are also trending similarly, including the Singapore dollar (which has just been revalued by the country’s government) and the Indonesian ruppiah.

Driving factors

Compared with other regional currencies, the ringgit has nominally gained the most against the US dollar since the start of the year.

Says Affin Investment Bank chief economist Alan Tan: “The ringgit is playing catch-up in the first half of this year as it lagged for most of the second half of 2009. Other regional currencies started gaining strength then.”

As most economists see it, the recent strengthening of the ringgit – and most Asian currencies for that matter – is mainly due to three factors: strong economic recovery and growth prospects for the Asian region, wide interest rate differentials between the US and Asia as some countries in the region have started to normalise their monetary policies and the widespread expectation that China’s lawmakers will allow the yuan to appreciate.

Amid the mounting pressure on China, there are growing expectations that the country will let its yuan appreciate against the US dollar in the second half of the year.

The correlation between the Chinese currency and regional currencies is strong – a rallying yuan will usually lift the regional currencies.

For example, the lifting of the ringgit peg to the US dollar in July 2005. This took place shortlty after China’s central bank revalued its yuan and shifted to a managed float.

(The yuan was pegged at 8.27 per US dollar from 1995 until mid-2005, when it was revalued upwards to 8.11 per US dollar and allowed to float against a basket of currencies, including the US dollar, euro and yen. In July 2008, the yuan appreciated 21% against the US dollar, and its value has since been pegged at around 6.83 per US dollar to this day.)


“The dollar will flow into high-growth regions, driving their currencies to appreciate,” OSK-DMG economist Enrico Tanuwidjaja tells StarBizWeek.

The World Bank expects developing East Asia (which includes Malaysia, China and Indonesia) to register 8.7% growth in gross domestic product (GDP) in 2010.

The Asian Development Bank’s projection is slightly lower at 7.5%.. Malaysia’s GDP growth forecast ranges from 5% to 7%. “The expectations of good growth rates are a major boost to investor sentiment,” says Alan.

More to gain or lose?

A recent CIMB Investment Bank report says that “the interplay of currency revaluation expectations and interest rate differentials will trigger more speculative inflows into the region.”

Malaysia’s move in raising interest rates since early this year has attracted some foreign fund inflows. This has led to the strengthening of the ringgit against major world currencies.

In March, Bank Negara raised the overnight policy rate (OPR) from a record low of 2% to 2.25%. The central bank is expected to raise the OPR again in the months ahead as part of the rate normalisation process.

This will widen the interest rate differentials between Malaysia and other developed nations, especially the US, that have been keeping and intend to keep their rates low for a longer period.

Economists say the widening interest rate differentials will continue to attract private funds to Malaysia as investors seek higher returns.

According to CIMB Investment Bank, the Malaysian equity market could “get a leg up from further OPR hikes.”

Foreign investors are seen to be taking a bet on asset reflation caused by a strengthening ringgit. Market analysts believe that in such instances, the most likely beneficiaries are blue chips such as banking and plantation stocks, among others.

ECM Libra Investment Bank says companies that derive their income mainly from the domestic or regional markets but have input costs or liabilities denominated in G3 (the US, Japan, and euro) currencies will gain.

Those in this category include Tenaga Nasional Bhd, UMW Holdings Bhd, AirAsia Bhd, Malaysia Airlines Bhd, Tan Chong Motor Holdings Bhd, QL Resources Bhd and KFC Holdings (M) Bhd.

Conversely, the strengthening of the ringgit will not bode well for exporters or companies that earn their income mainly in G3 currencies, and have input costs or liabilities denominated in the local currency. Fitting into this category, as analysts point out, are rubber glove and semiconductor companies.

From the international trade perspective, a stronger ringgit tends to make the country’s exports of goods and services costlier for overseas customers. In theory, this would inadvertently lead to lower demand for Malaysia’s products.

But economist Prof Datuk Dr Mohamed Ariff opines that the current appreciation of the ringgit will not significantly impact Malaysia’s export competitiveness because other regional currencies are also rising at the same time.

Says Tanuwidjaja: “Current external demand is driven mainly by intra-regional trade, while demand from developed nations remain relatively weak. The country will benefit more from the lower costs of imports and capital expenditure with a stronger currency.”

Bracing for volatility

Malaysian exports generally have high import content, and this could help mitigate the effects of a stronger ringgit on exporters.

It is estimated that for every RM1 of exports, 70% are intermediate goods imported from overseas. So, a stronger ringgit will help reduce production costs and help exporters maintain price competitiveness.

Will the ringgit’s uptrend continue? Based on current economic indicators, most economists say the trend is unlikely to continue.

They believe the ringgit is already near the tail end of an appreciating trend. They say the upside potential for the ringgit is somewhat limited and that some form of weakness will likely arise in the second half of the year.

Analysts believe the market should brace for volatility ahead as the ringgit’s appreciation is still vulnerable to the movements of international short-term capital.

“The outlook for the first half of the year is clearly an appreciating trend for the ringgit but uncertainties will set in by the second half of the year. Hence, the belief that the strengthening of the ringgit, and other Asian currencies for that matter, will not be sustainable in the latter part of 2010,” says Tanuwidjaja.

Economists believe the growth of Asian economies will be less vibrant in the second half, compared with the first half.

In addition, there is the possibility of policy change by developed nations, particularly the US, as the recovery of their economies gathers pace in the second half of the year.

It is widely speculated that the second half of 2010 will mark the end of the “extended period” for record low interest rates for the US.

Interest rate differentials between the US and other Asian economies will likely be narrower then. This will result in funds flowing back into the country, and the US dollar is likely to react favourably and regain its strength against other currencies.

Taking into account the possibility of this scenario, several local research houses have ascribed a year-end target for the ringgit against the US dollar at between 3.20 and 3.30.

Then again, what about the possible revaluation of the yuan?

Says Alan of Affin: “The market has already priced in such possibility, and even if there’s really a change in the yuan policy, we believe it will be gradual and moderate. We don’t think there will be any sharp or surprise movement in the yuan, so as to minimise the impact on China’s export competitiveness.”

Significantly undervalued?

It is generally perceived that several Asian currencies, including the ringgit and the yuan, are significantly undervalued against the US dollar.

Foreign studies claim that the exchange rate misalignment, in terms of undervaluation against the US dollar at the end of last year, for the yuan was as much as 40.7%.

For the ringgit, it was around 30.5%, while the Hong Kong dollar and the Singapore dollar were misaligned by as much as 32.2% and 24.7%, respectively.

While many Asian currencies have strengthened against the US dollar, their recent appreciation were merely nominal gains. Measured in real terms, that is, after adjusting for inflation, the gains of Asian currencies were only marginal.

The ringgit, in real effective exchange rate, has only strengthened by a mere 1% against the US dollar year-to-date, and less than 3% from mid-2005, when its peg to the US dollar was lifted.

Hence, some quarters argue that there is scope for the ringgit to strengthen further against the US dollar.

But Bank Negara has previously stressed that the value of the ringgit is determined by market forces and that its present value is already reflective of the country’s economic fundamentals.

“To be a domestic and consumption-based economy, a strong ringgit is needed. But let’s be realistic here. Many industries in Malaysia are still export-driven, and a strong ringgit over the short term will definitely hurt them,” says Alan.

He says the ringgit has already appreciated to a level where some manufacturers are beginning to feel a bit uneasy and anxious over the possible loss of competitiveness.

Economists argue that any form of intervention by the central bank in the ringgit exchange should be focused on smoothing out the sharp volatilities that could cause instability in the financial markets, instead of managing the ringgit’s value against other currencies.

Otherwise, says Ariff, “any attempt by the monetary authorities to rein in the ringgit, except under exceptional circumstances, would cause serious price distortions and contribute to inefficient allocation of resources.”

Towards high income

Having a strong currency is in line with any nation’s ambition to be a high-income economy.

“Strong” currency in this sense refers to one that is well demanded and has a stable value, with its exchange rate driven by economic fundamentals.

There are compelling benefits for Malaysia to aim for a stronger ringgit in line with its ambition to be a high-income nation.

For one, a stronger ringgit will make travelling abroad more affordable for Malaysians, hence enhancing their scope for leisure.

A stronger ringgit will also encourage the import of capital goods, which contributes to the innovation and automation of industries in the country.

Above all, a stronger ringgit will help improve the living standards of the people by increasing their purchasing power through cheaper imports and lower inflationary pressure.

Malaysian Rating Corp Bhd chief economist Nor Zahidi Alias says that unless profiteering activities are thwarted, a stronger ringgit may not necessarily lead to cheaper imported goods for Malaysians.

The benefits aside, “a stronger ringgit per se should not be the over-riding objective,” says Prof Dr Tan Eu Chye of University Malaya’s Faculty of Economics and Administration.

“A stronger ringgit must be consistent with the fundamentals of the country’s economy. If fundamentals dictate that the ringgit should strengthen, then it should be allowed to appreciate,” he says.

For the ringgit’s advancement to sustain over the longer term, the implementation and execution of Malaysia’s New Economic Model (NEM) is critical, says Maybank Investment Bank.

Although the first part of the NEM has already been unveiled, many are waiting for more clarification and details of the plan to gain a clearer picture of the changing fundamentals of the Malaysian economy.

The consensus view is that there isn’t any material change in the key economic fundamentals of Malaysia yet. Hence, the unveiling of the second part of the NEM will be critical.

The World Bank says that as long as a stronger ringgit is justified by improved fundamentals, it can help the country gain mileage towards becoming a high-income nation.

“Otherwise, complacency may set in and we may not be able to sustain the high-income status eventually,” says Eu Chye.