Posted on Dow Jones News wire.
- Malaysian Ringgit Targets Lows, Ctrl Bk Won't Stir
KUALA LUMPUR (Dow Jones)--The Malaysian ringgit, one of Asia's worst-performing currencies so far this year, slid Friday to a two-year low. It may soon drop to levels unseen since the regional crisis a decade ago, but the central bank is unlikely to try to reverse the decline.
The dollar was trading at MYR3.6725 at 0600 GMT after hitting MYR.3.6785, up from Thursday's close of MYR3.6580 to the highest since November 2006.
"People are nervous and may continue to sell the ringgit because of flight-to-safety flows," said David Cohen at Action Economics in Singapore.
The ringgit is down 5% year-to-date as Malaysia's trade-reliant economy weakens further on the global slump. It has fallen 15% from its record high of April 2008, when the dollar traded down to MYR3.1310.
Many forecasters expect the U.S. currency to be trading in a higher MYR3.7000-MYR3.8000 range by midyear. Some traders say the dollar might break above MYR3.8000 - the level to which Malaysia pegged the ringgit for almost seven years from September 1998 - and even test MYR4.000.
Bank Negara Malaysia isn't likely to intervene heavily to defend the ringgit, analysts say, because inflation has been slowing since August, the currency's decline is in line with those of its Asian peers and Malaysia's exporters could use the boost of a weaker currency.
As long as other Asian currencies are falling, Bank Negara will likely maintain a "hands-off approach" to the ringgit, Cohen said. The ringgit's fall is significantly less than the 16% year-to-date drop by the South Korean won, but Cohen noted it's not "out of sync" with other competitors, such as the Indonesian rupiah, the Singapore dollar and the Thai baht.
"Like other central banks, Bank Negara is worried about economic growth," he said. "It has front-loaded its rate cuts and has allowed the exchange rate to weaken to recent lows because inflation has become less of a concern."
Malaysia's exports, which amounted to a hefty 124% of the country's gross domestic product last year, fell 14.9% in December from a year earlier, the steepest drop in seven years. Exports are expected to keep falling at least through the first half of the year.
Some economists, however, like Wan Suhaimie at Kenanga Investment Bank, expect a more active central bank to make a "reasonable effort to intervene and limit the ringgit downside within a reasonable range." He tips the ringgit trading mostly steady, with the dollar falling back by year end to MYR3.5200 if Malaysia economic growth starts to pick up in the fourth quarter.
Despite its slide against the dollar, the ringgit isn't doing badly on a global scale. On a nominal trade-weighted basis, it's down just 1.4% this year, said Citigroup economist Kit Wei Zheng, who tips the dollar rising to a MYR3.700-MYR3.8000 range in the second quarter.
One factor that could pummel the ringgit would be a downgrade of Malaysia's sovereign debt, Kit said.
Fitch Ratings cut the outlook on Malaysia's A-plus local-currency rating to negative this month and warned that the government was over-dependent on oil revenues, which account for 40% of budget revenue.
Charts also don't augur well for the ringgit. Dow Jones technical analysis suggests the dollar will keep rising against the ringgit in coming weeks.
Tuesday's break by the dollar above critical resistance at the Dec. 4 high of MYR3.6415 has opened the way for a test of the June-to-October 2006 highs at MYR3.6950. A break there would target MYR3.7800, the November 2005-January 2006 highs, and then the key MYR3.8000 line. A rise above that level would expose the dollar's upside to MYR4.0000 and then its the July 1998 peak of MYR4.3260.
A key factor for the ringgit will be the performance of the Singapore dollar.
If the U.S. currency, trading Friday S$1.5376, rises to S$1.7000, it could also spurt against the ringgit, hitting MYR4.0000, said a trader at a foreign bank in Kuala Lumpur. "That possibility is very real given the deteriorating domestic and external conditions."
By contrast, Citigroup's Kit expects the U.S. dollar to rise only to S$1.6000 at most, which would translate to a move to around MYR3.8000. Kit said the Monetary Authority of Singapore, which targets the city-state's dollar on a trade-weighted basis, won't let it weaken significantly more than that unless the euro "collapses."
A positive for the ringgit is Malaysia's recent MYR40 billion foreign-exchange swap with China, which provides some assurance in terms of liquidity as Malaysia's foreign reserves have fallen, said Suresh Kumar Ramanathan, a currency strategist at CIMB Investment Bank in Kuala Lumpur. Reserves including forwards have fallen to $91 billion as of the end of January from $145 billion in April.
Ramanathan forecasts a tight range for the ringgit, saying most of the bad ringgit news has been priced in by the recent drop. He forecasts the dollar rising to MYR3.7000 in the third quarter before pulling back to end the year at MYR3.6800 as the economy starts to recover.
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