Rising political risks may halt Malaysian ringgit’s rally: Analysts

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A money changer counts Malaysian ringgit banknotes for customers in Kuala Lumpur on June 11, 2015. The fall in the Malaysian ringgit would boost exports and encourage foreign tourists to visit the Southeast Asian country since goods and services will be cheaper. AFP PHOTO / MOHD RASFAN

Rising political risks may halt Malaysian ringgit’s rally: Analysts

The Malaysian ringgit has been one of the best-performing currencies in Asia so far this year, but some analysts think the rally may be short-lived.

Year to date, the ringgit gained 5 per cent against the US dollar to trade at 4.0400 early Friday (Mar 18), according to Bloomberg data, despite the protracted scandal surrounding Prime Minister Najib Razak and state investment fund 1MDB. Only the Japanese yen and the Indonesian rupiah have clocked in stronger gains, rising 5.4 and 5.9 per cent against the greenback respectively.

However, given how the scandal has since led to tensions within the ruling UMNO party, brewing political risks may derail this upward momentum in the currency, according to analysts from the National Australia Bank (NAB).

“Political risk has increased with growing tensions seen in the ruling party (and could) potentially impact market confidence in the government’s stability,” analysts Christy Tan and Julian Wee wrote in a note released Thursday, referring to the latest twists and turns in Malaysian politics including ex-leader Mahathir Mohamad quitting the ruling party for the second time.

“The twin threats going forward are additional revelations from external investigations into 1MDB, and the risk of Mahathir starting a new political party that shears off a sizable portion of UMNO and puts the viability of the government under threat,” NAB analysts added.

To be sure, there are other analysts who are more sanguine.

Christopher Wong, Singapore-based senior currency strategist at Maybank, said: “We won’t be all hunky-dory to say that everything is fine on the political side of things. Political risks, be it from 1MDB or within the ruling party, have always been there, but the key thing is that markets always tend to price in (these risks) ahead.”

That is why the ringgit has slightly underperformed fellow Asian commodity currency such as the rupiah, which is not bogged down by domestic woes, Mr Wong told Channel NewsAsia. The Maybank analyst expects the ringgit to strengthen to 4.1000 against the greenback by year-end

Tim Condon, chief economist at ING Financial Markets, agreed: “At this point, we have passed the worst of the political crisis. I think people are seeing that Najib has the situation under control and downgraded political-related risks.”

OTHER RISKS

Apart from politics, the ringgit could also be hamstrung by movements in global oil prices. NAB reckons the recent bounceback in the price of crude oil may soon be losing momentum, which would yet again dim the fortunes of the oil exporter.

“The bottoming of oil prices since the middle of January has seen the USD/MYR come off highs of around 4.4000. Going forward though, oil is not likely to provide the ringgit as much support given that any further meaningful upside in Brent would require significant changes in the underlying market conditions.”

NAB analysts also think that the central bank will be “more circumspect about intervening to support the ringgit” given how Bank Negara’s foreign exchange reserves have fallen 27 per cent to US$87.7 billion as of Feb 2016.

Meanwhile, investors will also be keeping an eye on the replacement for central bank Governor Zeti Akhtar Aziz, whose term ends next month. Thus far, Prime Minister Najib has given no indication who will succeed the veteran central bank governor.

“The Wall Street Journal reported over the weekend that the Prime Minister is set to announce that his choice for the new central bank governor will be Irwan Serigar Abdullah, the top bureaucrat at the Finance Ministry and advisor to 1MDB. The WSJ also reported that this choice was in opposition to outgoing governor Zeti Akhtar Aziz,” NAB’s report said.

The nomination of a new central bank governor from outside the central bank might trigger more concerns about future monetary policy direction and the central bank’s independence, analysts noted.

AGAINST THE SING DOLLAR

Given the raft of domestic risks, analysts that Channel NewsAsia spoke to largely expect the ringgit to weaken against the Singapore dollar moving forward.

Expectations for the Monetary Authority of Singapore (MAS) to keep monetary policy steady at its policy review in April will also keep the Sing dollar fairly steady, according to ANZ’s FX strategist Irene Cheung.

“We are looking at no change given how previous appreciation policies have been modest. February’s downgrade in inflation forecast is also nothing expected hence our base scenario is for MAS to not do anything,” said Ms Cheung, who expects the Sing dollar to fetch 3.02 ringgit by the end of 2016.

NAB recommends investors to go into a long SGD/MYR position, given lingering political risks in Malaysia and how Singapore’s central bank will likely stand pat on monetary policy next month. “Fundamentally, the Singapore economy remains on a fairly strong footing. The unemployment rate remains very low at 1.9 per cent and fiscal policy remains very slightly expansionary.”

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