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Malaysia’s Ringgit Heads for Steepest Monthly Decline Since 2016

Malaysia’s ringgit is heading for its biggest monthly loss in more than five years, as falling oil prices and a dovish central bank weigh on the oil exporter’s currency.

With oil prices erasing most of the gains made in the wake of Russia’s invasion of Ukraine in February, the ringgit, down 3.6% against the U.S. dollar so far this month, is poised for more declines on the back of China’s economic slowdown. 

“The ringgit’s drop is certainly a lot more than I expected,” said Alvin Tan, head of Asia currency strategy at RBC Capital Markets in Hong Kong. “The currency is primed for more weakness ahead so long as China’s growth risks continue to mount. Malaysia’s economic exposure to China’s economy is turning out to be a bane for the ringgit.”

China, whose economy is getting hammered by a series of Covid-related lockdowns, was Malaysia’s largest export destination in 2021. RBC is predicting that the ringgit, trading at the lowest since May 2020 on Wednesday, could weaken toward 4.40 against the dollar by the end of the second quarter, a level last seen in April 2020. Set for its steepest monthly drop since November 2016, it is the second-worst performing emerging Asian currency this month after the win. 

The widening gap in monetary policy between Malaysia’s central bank and the Federal Reserve will also stand in the way of any meaningful gains in the ringgit soon. While the Fed endorsed an aggressive course of interest rate rises this year, Bank Negara Malaysia is holding back and will likely continue to do so. Tightening monetary policy when inflation is caused by supply shocks has limited effectiveness, Governor Nor Shamsiah Yunus said last week, even as March food inflation reached a five-year high.

“The drop in oil prices and central bank policy divergences are unfavorable for the ringgit,” said Jeff Ng, a senior currency analyst at MUFG in Singapore. “Bank Negara Malaysia will only hike once toward the end of the year, which will vastly pale in comparison to the amount of expected U.S. rate hikes this year. That’s why there’s been a flurry of short-covering interests in USD/MYR.”

Still, others see a reprieve for the currency, as the Fed’s looming interest-rate increases bring soaring U.S. inflation levels under control and weaken the dollar. MUFG is forecasting that the ringgit may reach 4.16 per dollar by the end of the year, while DBS sees it at 4.28. 

“It’s mostly a dollar view,” said Philip Wee, senior FX strategist at DBS in Singapore. “We expect the dollar to peak in the third quarter as attention turns to other central banks playing catch up in the normalizing policy. This will benefit the ringgit.”

Source By: Bloomberg