Ringgit hits 10-month low to dollar amid emerging market currencies sell-off

PETALING JAYA: The ringgit weakened as much as 0.54% to 4.1313 against the US dollar today following contagion effects from the sell-off in emerging market currencies and the escalating global trade tensions.
The local unit closed at 4.1283 to the dollar at 5pm today, down 0.47%, the lowest level since November 2017.
RHB Research economist Peck Boon Soon told SunBiz the recent depreciation in the ringgit was largely due to a stronger US dollar and the contagion effects from the slump in the Turkish lira and the Argentine peso. Meanwhile, the Indonesian rupiah plummeted to its weakest level since the 1997-98 Asian financial crisis.
"Although regional currencies Indonesian rupiah and Philippine peso saw selling pressure, they were not as bad as the Turkish lira and the Argentine peso."
FXTM research analyst Lukman Otunuga opined that the ringgit may experience further losses in the near term with US-China trade tensions promoting risk aversion and the US dollar buoyed by rate hike speculation.
"Technical traders will continue to closely observe how the US$/RM behaves above the 4.12 level. A stabilising US dollar could push prices towards 4.1380."
He said it is difficult to predict the worst-case scenario for the ringgit, especially when considering how the current weakness is based heavily on external forces.
"Risk aversion from escalating US-China trade tensions, US rate hike expectations and an appreciating US dollar may offer nothing but pain to emerging market currencies including the ringgit. If domestic economic growth continues to disappoint, this may intensify the downside pressure on the ringgit with 4.1600 acting as a level of interest."
Nonetheless, Peck believes the ringgit should stabilise, with catalysts being high crude oil prices and current account surplus.

For Otunuga, the primary catalyst for the Malaysian currency remains global trade developments as market sentiment is highly sensitive to the US-China trade tensions with any sign of escalation promoting risk aversion, ultimately punishing emerging market currencies.
Meanwhile, on the local equity market outlook, AmResearch remains positive on the FBM KLCI with its earnings expected to grow 3.6% and 6.8% in 2018 and 2019, underpinned by gross domestic product growth of 4.8%-5.0% and 4.2-4.5%, respectively.
The research house is maintaining its end-2018 FBM KLCI target of 1,900 points, implying a price-to-earnings ratio of 18.3 times, which is consistent with the medium-term target of 18.5 times.
The FBM KLCI lost 6.08 points or 0.33% to close at 1,813.58 today.
AmResearch believes investors' sentiment towards emerging markets, including Malaysia, will improve when the market feels that the US rate hike cycle and the US dollar upcycle are about to taper off.
In addition, it said market sentiment will turn better when the risk-and-reward profile and the valuation-to-growth matrix of emerging markets become attractive again after the recent sell-off; and if commodity prices stay firm, which could strengthen the finances of commodity-exporting emerging markets.
However, the research house is mindful of various headwinds that could cap the upside of the FBM KLCI, including the hawkish US Fed; investors' cautiousness towards emerging markets; the structurally rich valuations of the Malaysian equity market against its regional and global peers; and external risks such as international trade tensions and the potential of a new European Union existential crisis.