Ringgit remains volatile to cross-border portfolio flows; subdued internal uncertainty persists

The Malaysian ringgit remains susceptible to external factors that drive cross-border portfolio flows and playing a decisive role in influencing the MYR exchange rate in the coming months as Malaysia’s domestic political uncertainty has subsided markedly.

The MYR has been running a significant correlation of about 80 percent with the KLCI share index on the basis of weekly percentage change this year. In the past eight weeks, foreign investors purchased net USD633 million of local shares.

In addition, overseas investors added to their positions in MGS by USD1.24 billion and USD796 million respectively in June and July. In the meantime, the MYR’s susceptibility to fluctuating oil prices has weakened somewhat, note Scotiabank.

In the second quarter, domestic demand remained Malaysia’s growth engine, offsetting a continued decline in net exports and a drawdown in inventory. It contributed 5.7 percentage points to a 4.0% year-on-year growth in the economy.

The Bank Negara Malaysia (BNM) is expected to stay on hold at its September MPC meeting after trimming its overnight policy rate (OPR) by 25 basis points unexpectedly in July. Now the MYR ND IRS curve is discounting a 12 bps rate cut within three months or a 20 bps rate cut in the six months ahead.

"We expect the nation’s CPI inflation to rebound slightly in the months ahead and slow again in November," Scotiabank commented in its recent research report.

Meanwhile, Federal Reserve Chair Janet Yellen’s speech at Jackson Hole Symposium is anticipated to set the tone for global FX markets in the weeks ahead. It is expected that Yellen will reiterate on Friday that the Fed’s future policy decisions would remain data-dependent, while refraining from providing a clear calendar-based guidance on the next rate hike timing.

In this context, USD/MYR is likely to trade lower along with regional peers post the Symposium and break below the resistance trend line before testing 3.90 level on the back of global excess liquidity chasing high returns.

On the other hand, if Yellen delivers a more hawkish-than-expected speech on Friday, USD/MYR and USD/KRW will certainly rise at a faster pace compared to regional peers after the Symposium, heading for 4.12 followed by 4.26 given the nation’s high foreign ownership of local government bonds that was 34 percent as of July 2016.

"Last but not least, we expect USD/MYR to reach 4.15 at the end of this year by taking into consideration the prospect of hawkish comments from the Fed after the US Presidential Election set for 8 November," the report added.