Malaysia’s ringgit is headed toward a test of support at its 2017 low as oil prices slide, opening the door to the currency tumbling to levels last seen during the Asian financial crisis.

The ringgit has been in steady decline since the first quarter -- even as prices for the country’s commodity exports rose through much of this year -- leading analysts at Goldman Sachs Group Inc. to suggest that some companies have kept export proceeds in foreign currencies.

The currency is looking even more vulnerable now, with crude and palm oil dropping sharply from their 2022 highs in recent months. Any further decline in crude or a deterioration in risk sentiment over the coming weeks may sweep the ringgit down with them, according to Qi Gao, a foreign-exchange strategist at Scotiabank in Singapore.

The ringgit touched 4.4810 versus the dollar on Friday, the lowest since January 2017.

Then there’s the faster pace of interest rate hikes in the US, and Malaysia’s vulnerability to fund outflows. While the nation has seen equity inflows this year totaling $1.82 billion through Aug. 18, it can’t be taken for granted that they will continue. 

“The likelier determinants of dollar-ringgit movements are portfolio flows, rather than trade,” said Galvin Chia, an emerging markets strategist at NatWest Markets in Singapore. Another bout of broad-based risk aversion and large portfolio outflows could drive the ringgit to 4.50, he said. A breach of 4.5002 would take it back to lows of January 1998.

Malaysia’s central bank has increased its benchmark rate twice this year, in increments of 25 basis points, and there is the prospect of further hikes. But this pales in comparison to the Federal Reserve, which has lifted its key rate by 225 basis points this year and is set to keep moving higher in large steps.

In the week ahead, the dollar is liable to get a boost from any strengthening of hawkish rhetoric from Fed officials, while a ringgit rally would likely require Malaysian inflation figures due Aug. 26 to come in far above expectations. 

Source:
courtesy of BLOOMBERG

by David Finnerty

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