PETALING JAYA: With the US Federal Reserve (Fed) chairman Jerome Powell indicating an easing bias in 2024, have emerging market (EM) currencies like the ringgit reached an inflection point against the US dollar?
Currency analysts believe the local unit will make limited gains against the greenback even if the Fed starts easing its policy rates by September based on cooling data from the US labour market and inflation over the next two months.
More sustainable gains for the ringgit will need to be backed by the Malaysian economy starting to show material gains from the economic transformation measures taken under the Madani economy framework.
“I don’t think we have reached an inflection point yet for the ringgit and other EM currencies. The US dollar could remain firm, given its relatively attractive carry, resilient US economic growth and its safe-haven role at times of geopolitical tensions.
“Moreover, ongoing weakness in regional anchor currencies like the Japanese yen and Chinese yuan looks set to persist, reflecting weak macro fundamentals in these economies,” MUFG Bank foreign exchange analyst Lloyd Chan told StarBiz.
The yen is at 160 to the US dollar, the lowest level since 1986, while the yuan remains weak at 7.27 per dollar due to troubles with the Chinese property sector and weak recovery in the economy. The local unit closed the week at 4.7 against the greenback.
Chan said the outlook for regional growth and macro policies, along with what the Fed will be doing with its policy rate, will be crucial determinants to turn the portfolio outflows into inflows for the Asia region.
The by-election loss in Penang for the ruling coalition on Saturday, which was blamed on the high cost of living and removal of diesel subsidies, will do little to boost investor sentiment in the local unit.
“We believe the ringgit will remain range bound at current levels as investors are still awaiting for stronger catalysts (for example, Fed’s pivot or domestic economic transformation to materialise) to drive the local unit stronger in the near future,” said Kevin Khaw, research analyst at IFAST Capital.
The move by Putrajaya to move to targeted subsidies for diesel from a blanket approach has had a marginal impact on public finances apart from being a move much anticipated by the market.
MUFG Bank’s report had stated the fuel policy action taken by Putrajaya had not moved the needle on its short-term outlook for the ringgit, with the bank maintaining its forecast for the unit to remain weak at around 4.75 against the US dollar in the next two months.
Chan said any reprieve for the ringgit will likely only come when the US Fed lowers interest rates and sentiment towards the Chinese yuan improves.
While the election result may see some debate to cut fuel subsidies further, MUFG noted with Putrajaya’s debt nearing its statutory threshold of 65% of gross domestic product, there is little room to take on more debt, leaving it with the option to either rationalise fuel subsidies further and pay down its debt or further raise the statutory limit.
“Raising RON95 fuel price will have a bigger inflation impact, given its relatively larger weight in the consumer price index basket. Every 10% increase in RON95 fuel price will add 0.6 percentage points to inflation.
“It will also likely be necessary to lift the price of RON95 fuel if the government wants to narrow its fiscal deficit to 4.3% of gross domestic product (GDP) this year as planned, from 5% of GDP deficit in 2023,” Chan noted.
Under Budget 2024, the government proposed to cut the total subsidy by RM11.5bil. The measures that have been taken so far – raising diesel prices (RM4bil) and lifting subsidies for chicken and eggs (RM3.8bil) in November last year – add up to only about RM7.8bil of potential fiscal savings per year.
This leaves another RM3.7bil worth of subsidy cuts required to meet the budget target.
Citigroup chief Malaysian economist Wei Zheng Kit was reported last week to have forecast the government can save an additional RM3bil to RM4bil this year if a 30-sen-per litre increase was made to the pump price of RON95 petrol and implemented this month.
MUFG also expects Putrajaya to rationalise RON95 fuel subsidies this year, with prices raised by as much as 35 sen to RM2.40 a litre from RM2.05 a litre now.
The inflation knock-on effect risks would leave Bank Negara in a prolonged rate pause at 3%.
It added that a slower pace of rationalising RON95 fuel price also means that prices will have to be raised by much more to achieve the remaining RM3.7bil of required cuts.
Meanwhile, Khaw said based on its latest dot plot projection, the Fed has raised the neutral rate to 2.8% from 2.5% previously, which he believes is a signal the US central bank is starting to accept the fact that inflation is going to be sticky for a longer period.
While the Fed has pivoted unexpectedly to rate cuts, Khaw’s base case is for the Fed to hold rates this year as inflation is far from being brought to heel.
“It’s time for us to accept this new paradigm: the era of easy money that investors have grown so accustomed to over the years is over. Higher-for-longer rates are here to stay.
“Even if the Fed does cut rates this year, it is unlikely to be as aggressive as what investors are pricing in at this moment. Interest rates would still be far higher than they were before the tightening cycle began in March 2022,” he told StarBiz.
The upcoming US presidential election might pose some risk to the US dollar to depreciate temporarily as investors dislike uncertainties, he added.
