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KUALA LUMPUR: The ringgit continues to stay at historically weak levels at near RM4.40 per US dollar but hopes of a potential reopening of China’s economy could revive short-term interest in the local currency.
According to economists and currency strategists, there are several factors that would influence the direction of the local currency but they agree that the factor seems to be the dominant one is the yuan’s movement.
“The soon reopening of China is positive for the Malaysian economy due to its high trade exposure with China.
“It will provide an upside for both the ringgit and the yuan, where both currencies tend to move lockstep when trade is viewed as a dominant factor underpinning currency strength,” Sunway University economics professor Yeah Kim Leng told StarBiz.
News wire reports said China’s government will further relax Covid-19 restrictions in Beijing and Shanghai, the two mega cities which have been under strict lockdowns for about two months to-date.
The city of Beijing is expected to soon return to normal life with infections falling, China’s state media said on Sunday.
While some travel restrictions are in place, they appear to also slowly being loosened, reports indicate.
SPI Asset Management managing partner Stephen Innes said the recent ringgit performance indicates that the local currency, along with other Asian currencies, are highly influenced by the yuan.
“The local currency is inexplicably tethered to the hip of the yuan. The yuan performance historically gets driven by bond and equity inflows similar to the ringgit but the ringgit is usually in catch-up mode with the yuan, given investors’ preference for China assets over Malaysia,” Innes told StarBiz.
He said a reopening of China’s economy that is anticipated this year may not be like before, as people’s conditioned behaviours there may have changed.
“This won’t resemble the party of the 2020 reopening, given the zero-Covid policy, which hints that people will be less inclined to socialise for fear of getting sent to detention centres,” Innes said.
“Hence I think the People’s Bank of China will err on the side of a weaker yuan to support exports but we will see episodes of strength as we get closer to a full reopening of China.
“And this will have positive reverberations across all Asian currencies but the sub RM4 to a US dollar glory days are unlikely to happen any time soon as countries move to internalising (rising protectionism) as opposed to globalising, which will hurt exporters in Asia,” he added.
Other than the yuan, analysts said the ringgit is also influenced by economic developments in the United States, noting that the recent dollar strength is by and large due to inflation.
“It’s an inflation story – the more sticky US inflation is, the more aggressive the market will price in Federal Reserve (Fed) rate hikes to catch up to inflation breakevens. And a stronger US dollar will follow suit.
“But generally speaking, when it comes to the US dollar move in the current environment, bond and equity markets are the two most important markets at the vanguard of currency determination,” Innes added.
Commenting on this, Yeah said US inflation is likely to have peaked in the short term, which will then temper Fed rate hikes moving forward.
“This would lead to weaker US dollar expectations. The ringgit will likely retrace its recent losses amid the strengthening economy and sustained double-digit export growth,” Yeah noted.
AmBank group chief economist Anthony Dass said he expects the US dollar would see some pullback in the second half of this year.
The US dollar index or DXY, which measures the dollar performance against a basket of currencies, is now near its 10-year high at 102.03 as at press time.
“A US dollar pullback will happen when the tone shifts from inflation and the Fed’s aggressive tightening to slower economic growth that will raise concern the Fed will pivot away from its aggressive hawkish tone,” Dass told StarBiz.“But for now, we believe the dollar gain is certain against high-beta currencies,” he added.
Dass also said the current weakening of the ringgit is due to the continued tightening of global liquidity, which have caused investors to reallocate funds to higher-yielding assets denominated in US dollar.
The ringgit is also being affected by China’s zero-Covid policy, which had led to a weakening of the yuan and affecting Malaysia-China trade.
“Nonetheless, we expect the ringgit to strengthen in the second half of 2022.
“The strong economic fundamentals, prudent ringgit management, capital inflows into equities and the pricing-in of the US rate hikes as well as new noises of potential economic slowdown in the United States would see the dollar exhibit some pullback,” Dass said.
He said that in the current risk environment, risky assets will continue to show instability and it would mean that the dollar’s risk balance is skewed to the upside.
“Besides, Bank Negara will continue to actively manage the ringgit to ensure that fluctuations are orderly and not excessive.
“This will allow the economic sectors to make investment and expenditure plans based on a more stable value of the ringgit,” Dass said.
He expects the ringgit to hover around the RM4.20-RM4.25 level by year-end.
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