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Showing posts with label USD. Show all posts
Showing posts with label USD. Show all posts

Tuesday, August 18, 2015

Property prices will hold as ringgit falls to new low against USD and S$


PETALING JAYA: The depreciation of the ringgit will not lead to real estate prices crashing.

The Malaysian Institute of Estate Agents (MIEA) president Eric Kho said property remained a sound investment despite the current economic climate.

“Holding property is always better than holding cash,” he said.

Kho acknowledged that demand for primary or new developments had slowed but not as a result of weakening currency.

He said the slowdown was due to Bank Negara guidelines for banks to be more prudent when providing loans as well as increased construction cost due to the Goods and Service Tax (GST).

Kho said construction cost had increased by up to 15% and some developers were holding back on launching new properties.

He said developers who had launched projects were offering huge discounts to attract buyers.

Kho said there was also a slowdown in the secondary market and those looking to buy could expect to pay between 5 and 10% less, depending on location.

Kho, however, expected this situation to be temporary and said property would eventually appreciate.
- The Star/Asia News Network

Ringgit falls to a new low

PETALING JAYA: China’s central bank adjusted the yuan downwards for the second consecutive day, sending markets and currencies reeling.

The ringgit continued its fall against the US dollar, hitting a new low of RM4.0275, largely due to the devaluation of the yuan.

All currencies in the region also continued with their decline against the US dollar.

On a year-to-date basis, the ringgit is the worst performer among its Asian peers, and is down 13.33%. This is followed by the Indonesian rupiah, South Korean won and Thai baht at 9.88%, 8.35% and 6.99%, respectively.

Comparatively, the yuan is now down approximately 4.61%.

The impact on the ringgit is worse compared to other countries because Malaysia is viewed as a net exporter of energy and prices are depressed now – hovering below the US$50 per barrel mark.

Stock markets across the region fell with the Jakarta Composite Index leading the pack by falling 3.1% followed by Hong Kong’s Hang Seng Index which dropped 2.38%.

There was a “bloodbath” on Bursa Malaysia where about 90% of the 1,000-odd stocks listed closed lower.

The benchmark KLCI fell for the fifth consecutive day, shedding 26.8 points yesterday to close at 1609 points. Since last Thursday, the index has been down by 116 points.

On Tuesday, the People Bank of China (PBOC) moved the guiding rate for the yuan 2% downwards and yesterday it set it at 1.6% lower. The guiding rate is the band within which the yuan is allowed to trade.

The downward movement is viewed as a devaluation of the yuan and the biggest currency movement for the world’s second largest economy since 1994. Although China abandoned its currency peg in 2005, the central bank manages the yuan in a tight range.

The devaluation of the yuan has sparked concerns that China’s economic slowdown was more severe than anticipated and the central bank had to devalue the currency to export its way out of the situation.

Independent economist Lee Heng Guie said that the devaluation that has sparked a global currency war may end up with no winners.

The impact on depreciating ringgit is likely to be felt most by companies which import their raw materials, consumers and parents with children studying overseas.

BY RAHIMY RAHIM, RAZAK AHMAD, AND L. SUGANYA The Star/Asia News Network

Ringgit hits new record low of 2.9109 to Singdollar

Malaysia's ringgit hit a new record low against the Singapore dollar on Friday (Aug 14).PHOTO: AFP

SINGAPORE - Malaysia's ringgit hit a new record low against the Singapore dollar on Friday (Aug 14), after the Malaysian unit slumped to a fresh 17-year low versus the US dollar.

With the fall in oil prices increasing concerns over the country's exports, the ringgit lost as much as 2.6 per cent to 4.1180 per dollar, its weakest since Sept. 1 1998.

It recovered some ground to trade at 4.0660 to the US dollar at 2:04pm, bringing its loss this week to about 4.5 per cent.

Malaysia pegged the ringgit at 3.8000 in September 1998 and maintained it until 2005.

Against the Singapore dollar, the ringgit tumbled 1.55 per cent to 2.9109 as at 11:45am from its close of 2.8665 on Thursday. The ringgit pared its losses to trade at 2.8944 as at 2:04pm.

Better-than-expected economic data on Thursday failed to dispel the gloom with the benchmark stock index falling 1.5 per cent on Friday morning, heading for its lowest close since 2012. Fve-year government bond yield rose to 3.982 per cent, its highest since November 2008.

Oil prices fell with crude futures hitting six-and-a-half lows, exacerbating worries about Malaysia's exports. The country supplies liquefied natural gas and palm oil.

Malaysia has also had to draw heavily on its foreign exchange reserves to defend its currency amid a political scandal, a yuan devaluation and slumping oil prices. Bank Negara governor Zeti Akhtar Aziz said on Thursday the central bank will need to rebuild the reserves that have fallen below US$100 billion for the first time since 2010.

"Foreigners are still selling," said Ang Kok Heng, chief investment officer at Phillip Capital Management Bhd. in Kuala Lumpur, told Bloomberg News. "Unless the ringgit stops weakening, I don't know how long the selling will continue." - New Straits Time

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Monday, August 10, 2015

The riddled Ringgit Malasia hits 17-year low against US dollar

Falling rate: A moneychanger worker showing the ringgit and US dollar notes in Kuala Lumpur recently. The ringgit is still falling versus the greenback.

Policy Matters - The riddled ringgit

CURRENCY traders are speculators. They make their money by taking bets; betting that this currency will rise, or that will fall.

Traders deal with the sentiments of the moment. They place their bets on the basis of expectations. They are quick to sniff weaknesses and take advantage of them.

The Malaysian ringgit has been vulnerable in the hands of traders. Not that traders are evil people. This is just how capitalism works.

Buying and selling from minute to minute, based on breaking news, even rumours, foreign exchange strategists do not ponder over fundamentals and the long-term equilibrium value of a currency when short-term pressures are overwhelming.

With allegations of financial impropriety running wild, there is nothing juicier that traders can chew on.

Bank Negara Malaysia, the one organisation that would know about the movement of huge sums of money, has been aloof. As waves of rumours and allegations rise and crash, silence does not do anything to quell speculation.

Then, there have been recent political developments: the deputy prime minister, other ministers and the attorney-general were dropped.

The prime minister has had to roll up his pants and walk into the rising tide. Any attempt to induce calm can, at times, induce more speculation.

Again, a field day for speculators.

The outlook is not very promising for much of the year.

A declining ringgit would make exports cheaper while raising the cost of imports. In the short run, theory indicates that the trade balance would decline.

With the passage of time, again as theory suggests, the volume of exports might increase. At this point the value of the ringgit would rise.

Until such time as the ringgit floats back to its equilibrium level, the declining ringgit will not do a lot of good.

A declining ringgit would make the consumption of imported goods from machinery and equipment to chocolates more expensive. This would lead to a decrease in household consumption of foreign goods and services, and it would also reduce investment in capital. The latter would not be beneficial because it would affect future production.

Should there be an interest rate hike in the United States in September BNM might find it necessary to respond with a hike in Malaysia. This might stem some of the capital outflow, but it would also act as a dampener on domestic investment.

The declining ringgit would drive the central bank to prop up the ringgit, as it perhaps already has. This has led to the decrease in international reserves. Malaysia has had more than adequate reserves, so a run-down on reserves will not be damaging.

It would be problematic to see the ringgit slip after the sell-off of reserves. That would mean wasting resources only to see a short-lived support of the ringgit.

Another worrying factor is the impact of the fall in the ringgit on Malaysia's foreign debt. A weaker ringgit would mean a higher cost in debt servicing.

International rating agencies are known to look unkindly at declining international reserves and exchange rate weaknesses.

Hence, a deeper concern might be a downgrade in Malaysia's credit rating. It would be a pity if Malaysia were to be slapped with a downgrade because the government has gone to great lengths to convince international agencies of our credit worthiness.

Although the outlook is not particularly bright, all is not out of our hands.

First, confidence must be restored in our economy. In particular, companies must be given the support they need to wade through the difficulties they face.

Second, the domestic political risk factors have to be better managed.

Third, although there is not much room for expansionary fiscal policies, it may need to be used to counterbalance an economy that is faced with a slump in confidence and enthusiasm. Stakeholders must be reminded that the country's development plans are on track.

Fourth, it is necessary to convince stakeholders that the central bank can act appropriately should the ringgit continue to face strong pressures.

Trying to save the day by persuading agents not to sell the ringgit has a flat timbre to it, at least under current conditions.

Fifth, initiatives must be taken to push ahead with good institutions and governance structures. This is in keeping with the government's overall programme, and it is now most opportune to stress the commitment to this objective.

The Malaysian economy has weathered many a crisis. The challenges that present themselves now are not trivial, but they are surely surmountable.

By Shankaran Nambiar

Dr Shankaran Nambiar is author of The Malaysian Economy: Rethinking Policies and Purposes. The views expressed in this article are his own. Comments: letters@thesundaily.com

Ringgit to ease further against US dollar next week


KUALA LUMPUR: The ringgit is expected to depreciate further against the US dollar next week, as falling commodity prices coupled with domestic political development will hurt investor confidence further, a dealer said.

The dealer said consistent talks over a possible US interest rates hike next month has prolonged the greenback's strength, with most emerging Asian currencies succumbing to selling pressure including the ringgit.

Last Thursday, the ringgit breached 3.9000 against the dollar for the first time since the Asian financial crisis 17 years ago, amid political tensions. The local note was pegged at 3.80 per dollar from 1998 to 2005 during the Asian financial crisis by the then Prime Minister Tun Dr Mahathir Mohamad.

Capital Advisors Currency Trader, Justin Herling, told Bernama that other factors such as declining oil prices and China's struggling economy had largely contributed to the depreciation of the ringgit.

He predicted the ringgit to further depreciate to 4.05 over the next 30 days.

"However we see this as a short-term correction but in the long term fundamentals still remain strong," he added.

For the week just ended, the ringgit traded lower against the US dollar at 3.9220/9250 from 3.8230/8260 recorded last Friday.

The local currency also fell against the Singapore dollar to 2.8291/8317 from 2.7775/7799 last Friday and weakened against the yen to 3.1429/1458 from 3.0771/0800 previously.

It declined against the pound sterling to 6.0881/0943 from 5.9509/9563 last week and was easier against the euro at 4.2836/2885 from 4.1816/1860 previously. – Bernama

Getting into the ringgit engine room

The depreciating ringgit has caught the imagination of most people on the streets. Beginning this week, we are featuring a special column on the mechanics of the currency and the forces that dictates its movements.Armed with two decades of experience as an interest rate and foreign exchange strategist in various financial institutions, Suresh Ramanathan will be looking into the intricacies of currency markets. With a Doctorate in Economics from Universiti Malaya, Suresh specialises in Modelling of Interest Rate Swaps, Foreign Exchange Forwards and Monetary Policy Signalling.Voted as Asia’s best foreign exchange strategist last year by AsiaMoney, he remains intrigued and fascinated by the workings of financial markets.

JUST how much is a currency worth? Exactly what the last buyer was willing to pay for it. That is the short answer. The longer answer is complicated.

In Malaysia’s foreign exchange (forex) markets, figuring out what a currency is worth is suddenly urgent. Trading is erratic, bid and offer spreads are wide and volume is thin as the market adapts to currency volatility. Determining the fair value of a currency is not an easy task either, disagreements between economists on what the fair value is or how it is measured becomes a banter at coffee bars and rigorous in academia. While the simple approach in analysing recent currency weakness is taking a top-down approach – meaning looking into macro-economic issues, followed by external and internal factors – affecting the economy.

But in the current environment, it may not suffice. Expectations of currency depreciating is built over a period of time until it reaches a breaking point.

The breaking point for ringgit is when the rest of the macro economic variables such as economic growth, inflation and trade balances are impacted.

The big question being where exactly is the breaking point for the ringgit? For the ringgit, a factor that stands out, is the arbitrage-speculative mechanism in the forex forward market.

A forex forward contract is an agreement between two parties to buy or sell currency at a specified future time at a price agreed upon today. It is available in all banks and used primarily for exporters and importers as a hedging instrument. The forex forward market has two features – one being a deliverable forward contract traded in the domestic market and settled in ringgit.

The other feature being a non-deliverable forward (NDF) contract that is settled in US dollar and traded offshore. Generally the NDFs are traded in financial centres such as Singapore, London and New York.

The mechanism of how a NDF trade and settlement works is based on the tenure of the contract followed by the fixing rate. The tenure can range from one month to a year or more and the price is fixed at the time the trade is entered into between two parties.

The trade, fixing and settlement dates are crucial since the period between the inception of the trade and the fixing can decide the profit and loss of a non-deliverable trade.

The fixing of the ringgit against the US dollar is currently done onshore through a spot fixing mechanism monitored by Bank Negara. The mechanism of fixing the rate onshore or in the domestic market removes certain elements of arbitrage and speculation.

But it does not prevent traders from taking a position in the offshore market by going into an agreement to buy or sell NDFs. It provides an arbitrage opportunity. In simple terms, the difference between the spot rate that is fixed in the domestic market and the offshore rate indicated by the MYR NDF provides an arbitrage opportunity for traders.

The second channel of arbitrage – speculation involves yield when one buys or sell a currency contract in the forward market. Between the period of inception of the trade and the fixing date, the MYR NDF yield can move either way. It is here where banks profit the trade, via using the implied NDF yield arbitrage versus the onshore forward yield.

This spread has been the lynchpin of trading mechanism for currency markets, particularly for emerging market currencies that are not convertible in the international market and not allowed to trade offshore. This is a legacy that was left behind from the Asian financial crisis of 1997/98 when Malaysia imposed capital controls and ringgit no longer became an international tender.

In the current trading environment of ringgit, spreads on the implied yield between onshore and offshore forward markets have persistently stayed above 1%, since the third quarter of 2014. An implied yield spread of more than 1% between onshore and offshore forward market indicates weakness of the ringgit against the US dollar.

This provides an avenue for markets to exploit the difference in yield, particularly for financial institutions that have access to both the onshore and offshore foreign exchange forward market. As the arbitrage window gradually closes and the spread between offshore and onshore implied yield from the foreign exchange forward narrows, the impetus for the ringgit to weaken further slows in pace, and it is here the risk of the currency swinging to the firm side picks up momentum.

Bottom-line, it’s not the macro view ala top-down that affects the ringgit. It’s the trading arbitrage in the currency that truly plays a significant role for the ringgit’s current predicament.

By SURESH RAMANATHAN


The difference between now and 1998

THE ringgit is falling and so is the stock market. Contagion worries are building.

That scenario is a reality for Malaysian capital markets and the anxiety over a slowdown in China’s economy has got many worried about its effect on economic momentum in Malaysia.

Parallels from such a situation today can be drawn against what happened during the Asian Financial Crisis of 1997/98 but the setting is different than what happened almost 20 years ago.

Going back to 1997/98, it was a time when growth in Malaysia and South-East Asia was booming. Overheating worries turned into whether such growth was sustainable.

Starting with the attack on the Thai baht, the currencies of many South-East Asian countries were soon under attack.

The ringgit too felt the brunt of such attacks and at the worst, fell to RM4.80 to the dollar before recovering and ultimately pegged at RM3.80 to the dollar in September 1998.

“In 1997/98, it was contagion that caused problems. The currency crisis turned into a financial crisis,” says independent economist Lee Heng Guie.

The reasons for the fall in the ringgit this time is different.

The value of the ringgit was for some time after the peg was removed linked with the price of crude oil. As the price of crude oil rose, so the ringgit.

But as the price of crude oil collapsed like it has now, the ringgit felt the brunt. Political uncertainties in Malaysia is not helping the value of the ringgit.

The price of West Texas Intermediate is now at US$44.81 a barrel

The danger is what will happen to the real economy as the ringgit weakens?

The external trade sector will do well as seen in June’s export numbers. The steep decline of the ringgit in June lifted external trade by 5.0% year-on-year to RM64.3bil. “In part, the weak ringgit currency spurred exports growth during the month. Ringgit fell to an average of RM3.74 per US dollar in June versus RM3.60 in May. Exports growth were driven by most export products except the exports of petroleum including crude petroleum, LNG and petroleum products. Primarily, the exports of E&E surged by 13.5% following two months of contractions,” says AmResearch in a note.

Although there are similarities in the movement of the ringgit between 1997/98 and today, the stark contrast was economic strength.

In 1997 Malaysia had a current account deficit and a fiscal surplus. That situation reversed a year later and has been so ever since. The ringgit peg at RM3.80 afforded stability to exporters and that swelled the trade account in 1998. A fiscal deficit was realised after the Government embarked on priming, with the aid of lower government debt than today, to kickstart the economy which had been ravaged by a steep decline in economic activity.

One of the reasons why businesses found it hard going in 1998 was corporate leverage. A number of corporations were saddled with big debts and institutions such as Danaharta Nasional Bhd was formed to restructure corporate debt in Malaysia.

Conditions are reversed for most of corporate Malaysia today. Leverage has been kept in check and cash balances among corporates are in a far healthier state than it was in 1997/98.

The difference was also foreign reserves. From a high of US$34.6bil in May 1994, foreign reserves dropped to a low of US$17.5bil in 1997. Foreign reserves in Malaysia was US$96.7bil as at July 31.

Although the quantum of foreign reserves compared with the size of the economy is a comparative consideration, economists point out that the amount of reserves today is sufficient for nearly 7.6 months of imports. Back then, it was enough for just 3.2 months of imports.

“We have come a long way from the past. The banking system is well capitalised compared with back then,” says AmResearch economist Patricia Oh Swee Ling.

The biggest difference between 1997/98 and today are households.

During the Asian financial crisis almost two decades ago, household debt as a percentage of GDP was a meagre 16%.

At the end of last year, it was 87.9% and remains at an elevated level. The man in the street was generally immune to the crisis although there was an uptick in unemployment and higher loan repayments for loans as interest rates spiked.

While per capita income today is in excess of RM35,000 compared with RM12,314 in 1998, cost pressures have emerged. The goods and services tax (GST) has crimped spending power among consumers and retail sales, according to the Malaysia Retailers Association, contracted by 3% in the second quarter compared with a rise of 4.6% in the first quarter of 2015.

Purchasers by consumers has been a big factor in the growth of the economy and if private consumption, which accounts for 50% of GDP according to an economist, falls, then that will put pressure on economic growth in the second quarter.

Economic weakness ahead

Bank Negara will release second quarter GDP numbers next week and the general consensus is it will be lower than the first quarter. The consensus is for a growth of 4.5% for the second quarter.

Citigroup, in a note, projects second quarter GDP to come in at 4% compared with 5.6% in the first quarter.

“Services were dragged down by a 11.2% year-on-year plunge in motor vehicle sales post GST, while transport and utilities were also soft. Loan growth was stable, though fund raising in capital markets lifted financial services growth,” it says.

Citigroup says growth in mining slowed to below 8% from a year ago in the second quarter on weaker production volumes in gas and oil.

“Manufacturing also slowed below 5% year-on-year on softer April-May electrical and electronic production, although rebounding in June to 7.1% year-on-year. Growth was likely cushioned by a turnaround in palm oil production and strong construction.

“From an expenditure perspective, the slowdown in second quarter GDP growth was likely led by domestic demand, especially consumption. We remain cautious on third quarter prospects given continued slump in the Composite Leading Indicator, second half growth should be cushioned by base effects, a gradual recovery from the GST induced slump, and a lift to manufactured exports from a US recovery,” it says.

Affin Hwang Capital believes that despite households adjusting to the GST following its implementation in early April, it believes private consumption will remain supportive of economic growth in the second half, supported by favourable labour market conditions on the back of steady increase in income and low unemployment rate in the country.

“Malaysia’s real GDP growth is expected to slow from 5.6% y-o-y in the first quarter to an estimated 4.5% in the second quarter, before recovering to an average of 5% y-o-y in the second half. We highlighted that our full year 2015 GDP forecast remained unchanged at 5% in 2015, at the mid-point of the official forecast of between 4.5% and 5.5% (6% in 2014).”

Moody’s Investors Service was more optimistic. It expects Malaysia’s economy to grow by 5.1% in the second quarter.

“Exports are the main drag, driven by soft global demand and low oil prices. This filters through to the domestic economy as unemployment rises and consumers reduce spending. Capital expenditure should remain buoyant as government infrastructure projects come on line.

Malaysia’s economy should pick up later this year as the global economy strengthens,” it says.

By JAGDEV SINGH SIDHU The Star/Asia News Network

Slide continues despite efforts to arrest fall

THE ringgit slide continues despite aggressive attempts by the central bank to shore up the beleaguered currency.

Bank Negara said yesterday the country’s international reserves fell to US$96.7bil as at end of July, down US$8.8bil from a month ago. It came from a high of US$140bil in 2013.

Analysts said the recent sharp fall in reserves indicated that Bank Negara had step up its intervention in the currency market.

The ringgit had been under tremendous pressure in recent months as the outflow of funds continued unabated.

Bank Negara said foreign investors cut their holdings of Malaysian bonds by 2.4% to RM206.8bil in July. This is the lowest level of foreign holding in the Malaysian bond market since August 2012.

The outflow from the bond market coincided with the sell-off seen in the stock market.

MIDF Research earlier this week said global investors had pulled out an estimated RM11.9bil from Bursa Malaysia as of end of July.

This added to the RM6.9bil that left the stock market last year.

The rush to exit by foreign investors was a major force behind the ringgit’s sharp decline year-to-date. The local currency exchange rate against the US dollar hit 3.93 yesterday, which is a new 17-year low.

That put the ringgit down 11% year-to-date and made it Asia’s worst performing currency so far this year. To some, the currency’s recent plunge evokes an eerie reminder of past financial crisis.

The ringgit was fixed at 3.80 against the US dollar in September 1998, at the height of the Asian financial crisis. The currency peg was removed in July 2005.

Ten years down the road, the ringgit is again under pressure. And so are other currencies across the region as global investors adjust to the prospect of tighter monetary policy in the US.

In Indonesia, the rupiah was down 8.5% against the US dollar, while its stock market declined 8.7%.

Capital Economics, an independent macro-economic research firm said the biggest threat to Malaysia is slump of its currency and lower commodity prices that is hurting exports.

“With the exception of Malaysia, where US dollar debt is high, currency weaknesss is not a major threat to the region,” it said.

State owned Petroliam Nasional Bhd (Petronas) sold US$5bil of US dollar denominated bonds in March, while Tenaga Nasional Bhd recently said about 6% of its RM24bil debts are in US currency.

Others like 1Malaysia Development Bhd (1MDB) also have a significant portion of its RM42bil debts in foreign denominated currency.

Malaysia has also been hit hard by the fall in global commodity prices. The country is a net exporter of crude oil, liquefied natural gas and is ranked among the largest exporters of rubber and palm oil

For the first six months, exports declined 3.1% from a year ago, largely due to lower prices of commodities.

Next week will be a busy one for the market as the Government is scheduled to release the country’s factory output figures on Monday followed by gross domestic product (GDP) for the second quarter on Thursday.

The country’s economic performance and its outlook by the central bank should provide some bearing for the ringgit, which some analysts, including those at CIMB Research expect to touch RM4 against the US dollar by the end of the year.

By IZWAN IDRIS The Star/Asia News Network

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PETALING JAYA: The ringgit has fallen to its lowest against the US dollar since August 2009 amid concerns over the impact of low oil prices on Malaysia's economy and the timing of US interest rate hike. At 5pm yesterday, the ...

Sunday, February 1, 2015

Global currencies weaken in currency war against super US dollar; exporters gain


Central banks making moves to check appreciating currencies against US dollar

A number of central banks have been making moves to shake up their currencies over the past few months.

Faced with slowing global growth and lower inflation – disinflation or deflation in a number of countries – central banks started taking action primarily by cutting interest rates or injecting liquidity into the system.

From Japan increasing its monetary stimulus to Singapore putting the brakes on its currency’s appreciation against a trade-weighted basket of currencies, stemming currency appreciation has led to talk that a currency war could be brewing.

Using the value of currencies to boost trade-heavy economies has been the flavour, as global economic growth slows.

The International Monetary Fund cut its global growth outlook from 3.8% to 3.5% this year and with growth easing in China, Europe and a number of emerging economies, giving support to such economies has been the focus of governments.

The European Central Bank instituted its own quantitative easing (QE) policy on Jan 22 to get growth going in the European Union.

The effectiveness of that policy has been questioned, but the immediate result was that the euro, which has been weakening against the US dollar, continued to fall against the greenback.

With Japan flooding the market with liquidity to get growth and inflation going with its own QE, the result has been a marked weakness in the currency.

The yen’s steep depreciation against the dollar, according to reports, is causing uneasiness in South Korea, which competes almost head-to-head with Japan in the export markets.

What is allowing countries that have taken action to cut their interest rates has been the slowing inflation.

The steep fall in crude oil prices since June last year to below US$50 a barrel has eased inflationary pressure worldwide, as energy is usually the biggest component of inflation. It’s been reported that over the past six months, 18 out of 50 MSCI countries have cut rates.

The Reserve Bank of India, which has an inflation targeting policy, cut interest rates this month. India, along with Denmark, Switzerland, Canada, Egypt and Turkey, has cut interest rates this month itself.

That was followed by Singapore’s move to slow its rise against a basket of currencies, which saw the Singapore dollar continue its recent drop against the US dollar.

Falling inflation was the primary reason for the Monetary Authority of Singapore (MAS) to make its pre-emptive move to slow down the appreciation of its currency by reducing the pace of increase. But quite a number do not pin that move as a significant competitiveness boost.

“The adjustment does not translate into a massive competitiveness impact,” says Saktiandi Supaat, Malayan Banking Bhd’s head of foreign exchange (forex) research based in Singapore.

MAS’ next policy statement will be due in April where it could give some clarity on the competitiveness angle, but the drop in the Singapore dollar against the greenback does help to boost inflation, which is expected to be lower than had been earlier estimated. The previous outlook was for a -0.5% to 0.5% rise in inflation.

A slower rate of appreciation would also help Singapore’s economy, which is already dealing with cost pressures from a tight labour market where the unemployment rate was a meagre 1.6%.

Furthermore, with non-oil domestic exports reportedly dropping for the past two years, a weaker Singapore dollar will help, especially when exports to China and the United States have fallen on a year-on-year basis.

Pressure is also emerging in Thailand, where the stronger baht is also not helping with exports, which dropped 0.4% last year.

Finance Minister Sommai Phasee was recently reported to have said that the Thai central bank should “in theory” lower borrowing costs, and that exports are under pressure from a stronger baht.

Fundamentals back appreciation

The Philippine peso and the baht are two currencies in this region that have in recent months seen an appreciation against the dollar. The reason for this is that the fundamentals of these economies have improved.

“The Philippines is not reliant on commodities as much as Malaysia, Indonesia and Thailand and that is the biggest driver of its currency,” says a currency strategist in Singapore.

“It just registered its strongest gross domestic product (GDP) growth over three years since the 1950s.”

The Philippine economy grew by 6.1% last year after expanding by 7.2% in 2013.

Thailand, recovering from floods and political unrest, has also been a flavour for foreign investors since stability returned.

Its stock market in US dollar terms is now bigger than Bursa Malaysia and one of the reasons for the currency’s rise is the drop in oil prices.

The fall in crude oil prices is expected to have the biggest economic benefit to Thailand and the Philippines among countries in this region, according to Bank of America Merrill Lynch.

“Lower oil prices have not resulted in any sizeable GDP growth upgrade as yet for emerging Asia, in part because of slowing global growth outside the United States.

“Lower oil prices have, however, improved the trade surplus significantly, supporting the current account balance and FX reserves positions.

“Lower oil prices have also resulted in a sharp drop in inflation, particularly in Thailand, the Philippines and India, which has allowed central banks to stay accommodative. Emerging Asian countries will likely see a boost to GDP growth in the range of +10bp to +45bp with every 10% fall in oil prices, if the oil price drop was purely a supply shock,” it says in a note.

The low-inflation environment will also allow central banks in this region to become more accommodative.

“Lower crude oil prices and loose global monetary policy will likely keep inflation lower in 2015 with rising probability of rate cuts in Asean,” says Morgan Stanley in a note.

How low will the ringgit go?

The past three months have been a volatile period for global currencies and no more so when it comes to the ringgit, which is the second-worst performing currency in Asia against the US dollar over the past 12 months after the yen.

Directly, the drop in crude oil prices has affected the fundamentals of Malaysia and carved a chunk out of government revenue, as receipts from crude oil production account for slightly less than 30% of income.

With revenues depleted, the Government has revised its budget for this year to take into account crude oil averaging US$55 a barrel in 2015 from an earlier projection that it would average US$105 a barrel when the budget was announced last October.

The revised budget also led to a slight increase in the fiscal deficit to 3.2% of GDP from an earlier projection of 3%.

That percentage is lower than the 3.5% target for 2014.

Apart from fiscal discipline, the ringgit’s fortunes have been loosely linked to the price of crude oil.

With this July marking the 10th year when the ringgit peg to the US dollar was lifted, the decision to remove the RM3.80 to the US dollar peg was to ensure that the ringgit reflected the fundamentals of the economy.

Prior to that decision, the price of crude oil had started to rise, delivering valuable additional revenue to the Government.

When the peg was lifted, brent crude oil was trading at US$55.72 a barrel, and over the years, the ringgit loosely tracked the value of crude oil, often appreciating against the dollar when crude oil prices were high and weakening when crude oil prices dropped.

Anecdotally, the ringgit gained strength against the dollar when oil prices soared and approached the RM3 to the dollar mark when crude oil hit more than US$140 in 2008.

It dropped in value as crude oil prices retreated from there, and as crude oil prices went up again and stayed at elevated levels for a prolonged period, the ringgit then crossed the RM3 level into the RM2.90 range.

Forex strategists say sentiment does affect the movement of a currency, but it moves in parallel with the fundamentals of an economy. With Malaysia’s fortunes closely linked to the price of crude oil, it is inevitable that the thinking of the country’s fundamentals will also change.

“If energy prices continue to drop, then it will hurt the ringgit,” says a forex strategist based in Singapore.

Bank Negara governor Tan Sri Dr Zeti Akhtar Aziz recently said the ringgit, which is currently trading at multi-year lows against the US dollar, did not reflect Malaysia’s strong underlying fundamentals.

“Once the global events settle down and stabilise, the ringgit will trend towards our underlying fundamentals,” Zeti told reporters at an event.

Apart from lower crude oil prices, the ringgit has also been hurt by capital outflows.

Malaysia’s forex reserves in the first two weeks of January were at its lowest level since March 2011 and foreign investors held 44% of Malaysian Government Securities (MGS) as of the end of last year.

Analysts say while foreigners have sold off a chunk of government debt, the remaining are not expected to do so as long as they are making a decent return on their holdings. The rise in the value of the 10-year MGS will give support to their holdings.

A number of forex analysts think the ringgit will not slip below RM3.70 to the US dollar, but some do admit they did not think it would be trading at the current level of around RM3.63 a few months ago.

“If it does go to RM3.80, then people will get panicky,” says one forex analyst.

By Jagdev. Singh Sidhu The Star/ANN

Semiconductor and rubber glove makers to gain from weak ringgit

Kenanga Research believes that the semiconductor industry will stay resilient with the global sales continuing to show healthy momentum.

THE decline of the ringgit is generally viewed as a problem for the economy but there are always two sides to the story.

Exporters with high local ringgit-denominated content and strong external demand are the obvious winners as they are expected to benefit from the weakening ringgit.

The winners are said to be the semiconductor and technology, rubber gloves and timber-based sectors. The share prices of a number of those companies have already factored in the benefits to their business from the weaker ringgit after the currency started its decline,which was more pronounced since the beginning of the fourth quarter of last year.

On the semiconductor front, Kenanga Research says believes that industry will stay resilient with the global sales continuing to show healthy momentum. Bottom-fishing is recommended as a strategy especially with the current risk-reward ratio less favourable following rich valuations in some counters.

“Typically, first and last quarters of a calender year, the earnings for the semiconductor players are seasonally weaker.

“That said we see any price weakness in these stocks as opportunities to accumulate as the earnings shortfall could be made up by the seasonally stronger second and third quarters on the back of the resilient industry prospects,” it says in a recent report.

Screening through the semiconductor value chain, Kenanga Research sees Vitrox Corp Bhd, being the leading solution providers of automated vision inspection systems to continue benefiting from the increasing complexity of semiconductor packages, which requires enormous inspection.

The research house is sanguine over OSAT (outsourced chips assembly and testing) players such as Unisem (M) Bhd. Inari Amertron Bhd is among the research house’s top pick.

PIE industrial Bhd managing director Alvin Mui says the group would see its sales rising this first quarter.

“But this is due to the new box built products we are doing for the medical equipment segment.

“The weakened ringgit will of course boost our revenue and bottom line,” Mui says.

Meanwhile, Elsoft Research Bhd chief executive officer CE Tan says the weak ringgit has boosted orders for its LED test equipment for the first quarter of this year.

“We expect to perform by a strong double digit percentage growth over the same period last year,” he says.

Tan says the LED testers the group produces are niche products with competitive pricing.

Rubber gloves players have seen strong price appreciation since late last year. Maybank IB Research likes Kossan Rubber Industries Bhd due to its stronger earnings growth in financial years 2015 and 2016, underpinned by the full contributios of its latest three plants.

Meanhile, JF Apex Securities mentions Latitude Tree, Poh Huat and Heveaboard among the timber-based industry stocks that can benefit from strengthening US dollar against ringgit.

The US market is the biggest for the industry which will gain from cheaper ringgit-denominated local content and stronger US economic growth.

The losers from a weaker ringgit, JF Apex Securities Bhd senior analyst Lee Cherng Wee mentions, are automotive players which import a lot of parts especially for completely-knocked down vehicles.

Lee says counters such as Tan Chong Motors and UMW Holdings are likely to be affected.

RHB Research in a recent report says about 60% of Tan Chong’s manufacturing cost of sales is transacted in foreign currency (80% in US dollars) which RHB sees as a risk.

“Continued US dollar strength will crimp margins that will not be offset by a weaker Japanese yen,” it says.

Lee also predicts the consumer sector players with high imported content in dollar terms could risk slimmer margins coupled with sluggish consumer sentiment due to goods and services tax.

MIDF Investment Research analyst Kelvin Ong said he foresees banking groups with higher foreign shareholdings like CIMB Group Holdings Bhd, Alliance Financial Group Bhd, AMMB Holdings Bhd and Public Bank Bhd as banks that can be impacted by the weaker ringgit.

“Foreign shareholding may slip if the domestic currency continues to weaken. The Fed’s tightening of the interest rate turns out to be more aggressive than expected, and crude oil prices continue to be on a downward trend. This will impact valuations of banks, but on the flip side, it will present buying opportunities for investors on a more attractive valuation,’’ he says.

By Sharidan M. Ali and David Tan The Star/ANN

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