2023 has been a difficult year for almost all emerging market currencies on foreign exchange markets. Higher interest rates in the United States, instigated by the Federal Reserve in an attempt to battle high levels of inflation in the US, have encouraged traders to obtain greater exposure to the dollar. High levels of geopolitical risk and economic uncertainty have further incentivised traders to hold the greenback, which is considered to be one of the safest financial assets in the world.
However, the Malaysian ringgit (MYR) has suffered particularly badly. The Malaysian currency has been the worst performing currency in Southeast Asia and, in November 2022, hit record lows against the US Dollar. The ringgit has made some modest gains since then and is currently trading at 4.6705 against the dollar. But what could the rest of the year have in store for MYR?
US Interest Rates
The main factor that will drive MYR’s price for the rest of the year is interest rates in the US. Euan Maskell, a foreign exchange trader in London, told Disruption Banking that “emerging market currencies have been battered by the cycle of monetary tightening in the US – and this is especially true in Malaysia.”
“Interest rates in the US have now gone as high as 5.25% but the Malaysian central bank has only lifted rates to 3%,” Maskell added. “This significant interest rate differential means that traders have a very strong incentive to hold the US dollar – they are gaining a better yield for a lower risk investment. Malaysia’s economic fundamentals are relatively sound so it would seem that this is the reason for capital outflows from the Asian country.”
However, Maskell said that “we are approaching peak rates in the US.” The Fed recently took a slightly dovish move by pausing further rate hikes, although the central bank emphasised that more rate hikes would likely be in store. Most analysts expect that the Fed won’t start lowering rates until the beginning of 2024 at the earliest. That said, if the Fed starts to ease on further hikes, and indicates the tightening cycle is coming to an end, that could give the ringgit space to start making a recovery. It will all depend on what the US central bank deems fit.
Commodity Prices
Malaysia is a major exporter of oil and gas – having exported almost 9 million metric tonnes of crude petroleum in 2022. The sale of commodities is therefore a significant source of foreign exchange inflows into Malaysia. Easing commodity prices could put downward pressure on the ringgit as we head towards the end of the year. After Russia’s invasion of Ukraine in February 2022, and the volatility that prompted on oil markets, prices reached a 15-year high of around $120 per barrel. However, prices have now begun to stabilise across the board.
The Deputy Chief Economist of the World Bank, Ayhan Kose, recently noted that global commodity prices have been on a downward trend for some time. “The commodity price drops are partly due to slower global growth,” he said. With reduced commodity revenues as a result, Kuala Lumpur could see renewed pressure on its currency.
“The drop in global commodity prices is concerning for the Malaysian Ringgit’s outlook,” Maskell said. “Should the downward trajectory of commodity prices continue, we can expect the ringgit to follow suit, particularly if the Malaysian Central Bank decides to stop trying to prop up the currency.”
Exposure to China
Another factor to consider in ringgit markets is the Chinese economy. Malaysia is particularly exposed to the fate of China’s economy, particularly when it comes to tourism and foreign direct investment (FDI). Earlier this year, global investment banks including HSBC argued that China’s reopening after the various coronavirus lockdowns would boost the Malaysian economy and help the ringgit thanks to higher levels of Chinese FDI into Malaysia.
This has not played out quite as Malaysia would hope, however, given China has posted sluggish economic growth rates in the months after its reopening. According to the International Monetary Fund (IMF), “China still faces significant economic challenges. The contraction in real estate remains a major headwind, and there is still some uncertainty around the evolution of the virus. Longer-term headwinds to growth include a shrinking population and slowing productivity growth.”
Maskell told Disruption Banking that “the noises from Beijing have not been as positive as Malaysia would’ve expected.”
“The Malaysian economy is dependent to a large extent on trade with China in goods and services,” he said. “Many traders therefore thought when China reopened at the start of the year that MYR would start to strengthen significantly. This hasn’t happened: a real estate crisis and structural economic problems mean that China hasn’t yet returned to its pre-Covid levels. There is still some lingering pessimism in ringgit markets as a result.”
It seems that the Malaysian ringgit will continue to struggle on foreign exchange markets for the rest of the year – and potentially beyond. High interest rates in the US, lower commodity prices, and lower than expected growth in China will all continue to weigh on the Malaysian currency.
Author: Harry Clynch
