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Ringgit to gain strength and outperform major currencies

02/01/2012

By FINTAN NG
fintan@thestar.com.my


PETALING JAYA: The ringgit, which has fallen versus the US dollar in recent months, may strengthen in the coming months as risk appetite returns following more positive US economic data.
While economists expect the recovery to be gradual, flattish US Treasury yields in recent days could be a signal that appetite for safe-haven assets might dampen despite lingering concerns over the eurozone debt crisis.
Economists and currency strategists have pointed out in recent reports that the relatively higher interest rates and more positive growth outlook would continue to play a part in supporting the performance of Asian currencies.
Hor Kwok Wai, Hong Leong Bank Bhd's chief operating officer for global markets, said in an email reply to StarBiz that Asian currencies including the ringgit would outperform the major currencies this year due to comparatively higher interest rates going into 2012 as well as better growth prospects.
The current weakness in the ringgit was mainly a reflection of position adjustment as well as limited intervention by Bank Negara.
“We project the ringgit to strengthen to 2.90 (versus the US dollar) in the first half of 2012. However, going into the second half of 2012, there is some possibility of stability out of Europe and better growth in the United States to tilt the currency play back in favour of the euro and the greenback,” he said.
Hor added that Asian currencies were in a consolidation phase in 2011 after multi-year gains due to a slowdown in the global economy and the eurozone debt issues.
He pointed out that the ringgit had performed quite well against the US dollar this year, down only 3.5% while the Indian rupee had been one of the worst performers among Asian currencies, falling 19%.
Foreign currency strategists at Royal Bank of Scotland Group plc (RBS)said in a report published in mid-December that Asian currrencies except for the yuan, rupee and rupiah were undervalued as stronger fundamentals, including large current account surpluses, show.
They believe that risk-aversion and foreign currency intervention by policymakers were among reasons for the undervalued currencies in the region even as the share of global exports rose in recent years.
RBS analyst Sanjay Mathur remains bullish on the ringgit, pointing out that the current weakness in the ringgit was mainly a reflection of position adjustment as well as limited intervention by Bank Negara.
He sees the revised growth forecast to between 4% and 5% from 5%6% as “an employment generating level and can be achieved owing to the strength of the domestic economy” with higher palm oil prices, targeted fiscal support to lower income groups and ongoing improvement in incomes lending certainty to the growth target.
“This growth profile also suggests that the need to respond via rate cuts is absent,” Mathur said, concurring with the comments of other analysts who believe that the central bank might not cut rates this year.
Meanwhile, economists at Morgan Stanley Research expect Asia ex-Japan policymakers to start initiating targeted fiscal policy measures and selective monetary easing to help contain some of the downside risks to growth.
However, monetary policy measures would be less aggressive compared with the 2008/09 period as concerns over banking sector asset quality problems and trailing inflation in some countries leave limited room for manoeuvre.
Excluding India, Indonesia and China, they believe that should the growth outlook deteriorate, fiscal policy could play a bigger role in protecting growth with other Asian countries making interest rate cuts of between 25 and 100 basis points, at most.
For Malaysia, Morgan Stanley analysts Tan Deyi and Chew Seen Meng expect a cumulative 50-basis-point cut which would take the overnight policy rate to 2.5% by this quarter.
SOURCE: STAR ONLINE

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