The Malaysian ringgit is set to appreciate against the US dollar to 4.1 by the end of next year’s first quarter, according to the team at BMI Research.
The dollar-ringgit exchange rate (USD/MYR) had averaged 4.285 in the months of July and August but has fallen sharply (the ringgit has risen) in the first half of September.
In a move that likely piggybacked off strength in the Chinese yuan, the Malaysian ringgit rallied to a one-year high on September 8th when USD/MYR fell to just 4.18.
On Thursday morning, shortly after 11am in Kuala Lumpur, the dollar was buying 4.198 Malaysian ringgit.
Fiscal Consolidation to Support the Malaysian Ringgit
The BMI team’s view on Malaysia’s currency is based in large part upon the Malaysian government’s efforts to balance the national books – a cause to which the government remains committed in spite of lower commodities prices and sluggish economic growth.
Prime Minister Najib Razak’s administration have targeted a reduced fiscal deficit of 3.0% this year, having met last year’s target of 3.1%.
“We believe that the government will likely achieve its target in 2017 amid continued efforts to rein in expenditure while expanding its revenue base through a 6.0% GST,” said a BMI analyst.
“Over the longer-term…the balancing of the government’s balance sheet will be disinflationary and positive for the MYR.”
A Stable Yuan Required
BMI also believe that recent strength in the Chinese yuan is positive for the Malaysian ringgit.
China remains one of Malaysia’s top trading partners and foreign exchange analysts expect that MYR/CNY won’t move much in order to avoid materially impacting Malaysia’s terms of trade with China.
Amid the yuan’s rapid appreciation against the dollar in recent weeks and months (USD/CNY fell 3.5% in the four-week period ending September 8th and is down 6% since January), it follows that USD/MYR must also decline if rates in MYR/CNY are to be preserved. MYR/CNY has averaged 1.565 this year.
“The CNY and MYR have continued to move in the same direction and we believe that a stable CNY reduces the tail risks facing the MYR, as significant CNY weakness would likely feed through to downward pressure on the Malaysian ringgit,” BMI said.
Ringgit Remains Historically Cheap
The be all and end all of BMI’s argument is that Malaysia’s currency remains cheap by historical standards, and this will likely support the country’s exporters and spur MYR pricing adjustments in the medium term.
Compared to the currencies of Thailand, the Philippines and China, which, like Malaysia, are all sources of cheap manufacturing in Asia, the ringgit has depreciated markedly in recent years. Against these currencies, the ringgit’s losses since September 2014 average 18%.
The ringgit’s decline against its regional peers has allowed Malaysian exporters to flourish over the past year, with the most recent data from the government’s Trade Ministry showing exports growing at a whopping 30.9% annually (for the year to July). The Trade Ministry’s data easily exceeded the already bullish market forecast for an increase of 22%.
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