A combination of yuan appreciation, crude oil prices coming off their lows and shrinking likelihood of US interest rate hike this year contributed to the rise of the ringgit as one of the best performing Asian currencies.
With foreign capital returning to emerging Asian markets in search of higher yields, the ringgit gained 0.97% to close at 4.1310 against the US dollar.
This was in line with the rebound in Malaysia’s equity market, which saw its benchmark FTSE Bursa Malaysia KL Composite Index (FBM KLCI) rising 0.38% yesterday to close at 1,649.96, off an early high of 1,661.34, even as the country’s bond market continued to attract foreign inflows over the last five months.
Year-to-date, the Malaysian currency has gained about 4% against the greenback, making it the top performing currency in Asia, excluding Japan. This was in contrast to the ringgit being the worst performer in the region last year.
According to economists, the strengthening of the ringgit yesterday was in tandem with the rebound in regional capital markets, as the risk of China devaluing its currency eased and crude oil prices remained steady in recent days.
Working in the ringgit’s favour, they noted, was also the weakening of the US dollar, which was driven by a downgrade in market expectations over the pace of future interest rate hikes in the world’s largest economy.
“The recent strengthening of the ringgit is a result of China’s currency move, as much as it is a reflection of the improvement in crude oil prices,” AllianceDBS Research chief economist Manokaran Mottain told StarBiz.
“It is also attributable to the weakening US dollar, following weak economic data and hints from the US Federal Reserve that there might not be any rate hike in the near-term,” he explained.
The People’s Bank of China (PBOC) yesterday set the average yuan exchange rate higher by 0.3% – which was the biggest increase in three months – at 6.5118 against the US dollar. This drove the yuan, which is still allowed to move to a maximum of 2% on either side of the reference rate, to close 1.23% higher at 6.4945 against the greenback.
Over the weekend, PBOC governor Zhou Xiaochuan was quoted as saying that there was no basis for the yuan to keep falling.
Zhou also said that China was committed to keeping its currency stable against a basket of other major currencies, while managing the daily volatility of the yuan against the US dollar.
Besides China’s policy action, the strong rebound in global crude oil prices since last Friday also contributed to the improvement in investor sentiment, which drove regional capital markets higher.
Brent crude, which is the international oil benchmark, has jumped by about 10% since last Friday to trade at the US$33-per-barrel level on renewed hopes of a production cut by the Organisation of the Petroleum Exporting Countries. This helped ease concerns over Malaysia’s declining revenue from oil and gas sources.
“As long as crude oil prices do not go below the US$30-per-barrel level, the ringgit will remain relatively steady amid the reversal in the outlook for the US dollar,” Singapore-based head of foreign-exchange research at Malayan Banking Bhd Saktiandi Supaat said.
In its fixed-income report, BIMB Research said: “We believe that external developments, with the Bank of Japan’s adoption of negative rates and a dovish US rates market, supported flows into higher yielding regional currencies of which the MGS (Malaysian Government Securities) benefited as well.”
As at end-January 2016, foreign ownership of MGS rose to RM164.4bil, or 47.9% of total outstanding MGS, from RM162.1bil, or 47.7%, in December 2015.
Meanwhile, the ringgit also traded higher against other major currencies yesterday.
It rose 1.1% against the Singapore dollar to 2.9536; 1.6% versus the Japanese yen to 3.6264; 1.5% against the euro to 4.6238; and 1.1% against the British pound sterling to 5.9870.