Tuesday June 25, 2013

Volatile trade likely for ringgit

This is US Fed announcement on impending unwinding of quantitative easing measures

A money changer is seen in Bukit Bintang, Kuala Lumpur. The ringgit has been among the top losers year-to-date in the region A money changer is seen in Bukit Bintang, Kuala Lumpur. The ringgit has been among the top losers year-to-date in the region

PETALING JAYA: The ringgit is likely to experience volatile trade in the RM3.15 to RM3.25 band versus the US dollar over the next three months, following the US Federal Reserve's (Fed) announcement on the impending unwinding of quantitative easing measures.

Alliance Research chief economist Manokaran Mottain said in a report that the bond purchases of US$85bil (RM273.79bil) per month would be a topic of discussion in the July Federal Open Market Committee meeting.

“In this regard, we expect further strengthening of the dollar, accompanied by market conviction that the tapering off would occur as early as year-end,” he said.

This comes as Fed chairman Ben Bernanke hinted last week that bond purchases would be trimmed progressively and end by mid-2014 if the US economy improves as expected.

The ringgit has been among the top losers year-to-date in the region, while the benchmark FTSE Bursa Malaysia KL Composite Index has also closely tracked the currency's movement. The index closed 1.01% lower at 1,738.19. Year-to-date, the index has gained 2.92% but has fallen from the closing high of 1,788.43 on May 14.

“The sharp depreciation was in line with regional currencies, triggered by the influence of a stronger greenback after the recent Fed announcement of the impending unwinding of quantitative easing,” Manokaran said.

He noted that key indicators also showed short-term weaknesses in Malaysia, including exports, which have fallen for the third month in April.

“On a three-month moving average basis, exports decline widened further by 5.4% in April (minus 3.1% in March), suggesting a short-term weakness in the country's overseas shipments,” Manokaran said.

Meanwhile, rating agency Moody's Investors Service analysts said in their annual credit analysis on Malaysia that the country's A3 sovereign rating would be maintained with a “stable” outlook anchored on resilient growth and a strong external position.

However, they noted that debt levels continued to rise, as deficits remained relatively wide.

“The stable outlook balances the initial gains from the Government's efforts at administrative reform and economic restructuring against structural weaknesses in the Government's finances.

“Government revenue is still reliant on hydrocarbon-based receipts, while the subsidy bill remains a main driver of expenditure growth,” they elaborated.

They added that fiscal policy had been increasingly constrained, as debt levels had risen towards the debt ceiling of 55% of gross domestic product.

“The Government has reiterated its commitment to the narrowing of the fiscal deficit and implementing associated reforms, but the ruling coalition's weaker electoral mandate could slow the pace of fiscal consolidation.

“The current account surplus has eroded due to a deterioration in export demand against the backdrop of strong domestic economic activity. At the same time, Malaysia's external accounts continue to be healthier than most similarly-rated peers,” the analysts said.

They said the country's relatively large banking system posed manageable risks, while an improved assessment of the country's capacity and willingness to service cross-border payments had led to higher foreign currency bond ceilings, as announced in January.

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