No strong rebound in sight for ringgit

PETALING JAYA: Economists do not foresee a strong rebound in the ringgit following another round of measures by Bank Negara to stablise the currency, as it could be seen as micro-managing and even a form of capital controls despite the central bank’s repeated denial of such inclinations.
The ringgit strengthened 0.2% to 4.4475 against the US dollar as at 5pm yesterday.
While the latest measures will help further stabilise ringgit trading, HLIB Research said in the short term, foreign investors may still view the central bank’s measures as micro-managing and decide to stay away from Malaysian assets until re-rating catalyst emerges.
Apart from that, the research house said the ringgit trend will still be influenced by US dollar strength induced by Trump’s policies.
“Moreover, adverse developments in the euro area (Italy referendum, UK Brexit & series of elections in 2017) may continue to strengthen the US dollar against other currencies,” it added.
HLIB Research is maintaining its ringgit forecast at RM4.20 to RM4.50 against US dollar for the remainder of this year and RM4.10 to RM4.40 for 2017.
Overall, HLIB Research is still positive on the measures, in particular for export proceeds which is expected to centralise forex at Bank Negara to the tune of RM60 billion equivalent per annum based on trade surplus assumption of RM80 billion per year. It said this represents a powerful avenue to build up reserves and enhance forex liquidity in the onshore market.
It pointed out that since 2011, Bank Negara reserves were mainly contributed by portfolio inflows (i.e rising foreign holdings in government papers) while trade surplus, despite being hefty, has not been converted significantly.
“This has caused the ringgit to be highly sensitive and vulnerable to reversal of global capital flows as seen in taper tantrum (2013) and recent Trump-induced outflows,” it explained.
Commenting on the flexibility of onshore ringgit hedging, HLIB Research opined that the measures represent baby steps by Bank Negara to liberalise and help develop domestic forex market, after tough measures two weeks ago to rein in offshore non-deliverable forwards.
It also stressed that commitments of market makers in the secondary bond market would enhance market liquidity and reduce incidents of sudden spike which causes market panic.
Meanwhile, MIDF Research said Bank Negara’s latest move reflects its stand to remain accommodative for the financial market while at the same time protecting the interest of the country.
However, it opined that a 25% limit to retain export proceeds in foreign currency may not be sufficient to address the current capital outflow situation.
“The limitation set on exporters should be good for the ringgit, but it could be offset by the perception that it is a form of capital control,” it said.
Exporters may now only retain up to 25% of export proceeds in foreign currency and they can hold higher balances with approval from Bank Negara to meet their obligations in foreign currency.
MIDF Research noted that the latest dynamic hedging instrument should be a good move in the longer term, particularly in order to facilitate foreign exchange rate risk exposure of capital market investors.
Residents may now freely and actively hedge their US dollar and Chinese yuan exposures up to a limit of RM6 million per client per bank.