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Mixed views on cause of currency’s fall

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by November 12, 2016 General

EXPERTS are mixed on the causes of recent depreciation of the ringgit against the US dollar, although Bank Negara has attributed the foreign exchange fall to speculation positioning.

Following the downtrend of the ringgit as it touched daily low of 4.3700 yesterday, Bank Negara has called for calm in the market and said that the current volatility is due to external environment.

The central bank has assured that the domestic market fundamentals remain intact.

“(The) ringgit will continue to face volatility mainly due to uncertainties in the external environment. The value of the ringgit should not be determined by speculative position,” says Bank Negara governor Datuk Muhammad Ibrahim.

However, Macquarie Bank Singapore head of foreign-exchange and fixed-income strategy Nizam Idris disagrees with Bank Negara’s analysis, saying that it does not do any good to blame speculation as the main culprit behind the ringgit fall.

He says that with Donald Trump clinching the US presidency, fear of sudden interest rate hike has become more apparent.

Donald Trump has been a proponent for increase in the federal funds rate, although the Federal Reserve chair Janet Yellen announced ​on Nov 2 that Fed would not increase its target for interest rate in the short term.

“Truth is, the Malaysian bond is overvalued and was awaiting a trigger point to reverse the situation to normalcy.

“The success of Trump in the polls is merely the trigger point,” says Nizam when contacted by StarBizWeek.

He says investors are fleeing the domestic bond market and more bond sell-offs can be expected, moving forward.

“The equity markets of the Asian economies, including Malaysia, will also suffer from exiting portfolio investments.

“This is because Trump is strongly opposed to the Trans-Pacific Partnership and countries such as Malaysia and Vietnam will be hit more severely relative to others,” he stresses. To note, Malaysia and Vietnam are among the 12 countries in the Trans-Pacific Partnership, which is yet to be ratified.

The foreign-exchange expert forecast ringgit to drop further, hitting RM4.50 against the greenback by early 2017.

When asked about his opinion on what the central bank can do in response to the ringgit fall, he says Bank Negara should introduce measures to limit volatility in the currency.

“The central bank should not go against the market by trying to shore up the ringgit.

“Bank Negara would only end up subsidising investors who want to leave the market, which is not a good move,” Nizam cautions.

Meanwhile, Inter-Pacific Securities head of research Pong Teng Siew concurred with Bank Negara that the ringgit depreciation against the greenback is due to speculation, while adding that Malaysia’s economic fundamentals are sound.

“It is expected that the incoming US president will emphasise more on fiscal measures compared to monetary policy, causing a hike in interest rate.

“Thus, hot monies from Malaysia are exiting the domestic market, causing the ringgit to trade lower than the US dollar,” says Pong.

He expects the recent development of the ringgit is only for short term and estimates the market to return to normalcy by January 2017.

Pong highlights that foreign exchange rates are not just about supply and demand of the domestic currency, but are also linked to relative competitiveness of the exporting countries.

The low of 4.3700 is the weakest since Jan 22, although it is still higher than 4.140 seen in Jan 12, this year.

HSBC Global Research points out in its forex strategy that the Trump victory “is a major risk-off event for forex markets”.

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