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Sunway University business school professor of economics Yeah Kim Leng(pic) said the spike showed that there was strong demand for hedging against expectations of a continued weakness in the ringgit, ahead of expectations of an increase in the US interest rate.
PETALING JAYA: The ringgit traded in calmer waters against the US dollar, with the difference in the price of the currency in the official and speculative markets narrowing.
But indications are that the volatility of the local unit will persist in the next few weeks, analysts said.
The ringgit appreciated by 0.26% to RM4.33 against the US dollar yesterday in the spot market.
The spread between the onshore US dollar-ringgit exchange rate and the rate offer in the offshore market, also known as the ringgit non-deliverable forward (NDF) market, also narrowed.
At the time of writing, the one-month US dollar-ringgit exchange rate in the NDF market, which is not recognised by Bank Negara and deemed as speculative, was trading at RM4.38, which is not far off the onshore rate of RM4.33.
“The ringgit appreciated against the US dollar as there was enough supply of the greenback in the system, unlike last Friday,” said a trader.
Last Friday, banks did not go into any US dollar-ringgit transactions upon the behest of Bank Negara, as the rates were too volatile for the local banking system to price the US dollar appropriately. On Sunday, Bank Negara assured that there would be adequate supply of the US dollar, which contributed largely to the calm trading environment yesterday.
However, the one-month forward yield of the US dollar-ringgit trade in the NDF market spiked up to 17% in early trade. The forward yield was closer to 10% after 5pm.
The forward yield indicates the level of interest by speculators taking an arbitrage position between the onshore and offshore US dollar-ringgit exchange rate. The yields are normally at about 3%.
Yesterday saw an abnormal spike in the one-month forward yield of the US dollar-ringgt trade in the NDF market.
Sunway University business school professor of economics Yeah Kim Leng said the spike showed that there was strong demand for hedging against expectations of a continued weakness in the ringgit, ahead of expectations of an increase in the US interest rate.
“There is a lot of speculation that the interest rate hike will come steeper and faster, given the new US president’s inclination towards greater fiscal spending to boost the economy and the corporate sector.
“Hence, what’s happening is an outflow of foreign funds from emerging markets back to the US by investors seeking higher returns there.”
Yeah said that until there is more clarity on what the new president’s exact policies are, there would be continued volatility across the markets.
Meanwhile, a senior technical analyst who tracks both the stock and currency markets told StarBiz that although the ringgit strengthened against the dollar, the charts indicate weakness of the local currency in the next few weeks.
According to the technicals, the US dollar/ringgit daily chart showed that the greenback had reached the overbought levels, suggesting that the ringgit may appreciate over the next few days.
On the stock market, he said the 14-day relative strength index was oversold, indicating that there could be a technical recovery in the short term.
“However, the upside potential is likely to be capped,” he said.
He added that important support was pegged at the 1,600-point psychological level, while the immediate resistance is expected at the 1,640-point barrier.
Another economist when contacted said that “what seems to be happening is that there is selling pressure on the FBM KLCI and bonds in the onshore market, as the prospect of higher US bond yields are weighing negatively on the emerging-market space such as Malaysia. That has added pressure on the ringgit.”
Traders have also taken cognisance of Bank Negara’s warning on Sunday that it would not tolerate any transactions that facilitated trade on the NDF market. The NDF, which is an instrument for investors to trade forward rates for the ringgit, is settled in US dollars and is not recognised by Bank Negara.
Meanwhile, CIMB Investment Bank Bhd said the ringgit could touch between RM4.50 and RM4.80 against the US dollar within the next three to six months premised on the lack of clarity of the new US administration’s policies.
“Since the election, the US yield curve has steepened to reflect the market’s expectation of an inflationary impact of (president-elect Donald) Trump’s campaign promises.
“This narrowed the premium of emerging-market yields over the US and resulted in the unwinding of carry trades funded in US dollar.
“The ringgit has fallen in line with this trend and the weakness was further compounded by the relatively high foreign holdings of Malaysian government bonds,” it said in a report yesterday.
According to MIDF Equities Research, foreign funds were net sellers on Bursa Malaysia in the week ended last Friday at RM800.4mil, although the amount was lower than the RM948.1mil offloaded in the previous week.
“Still, it was the seventh-highest weekly outflow this year, estimated based on transactions in the open market which excluded off-market deals,” it said in its report.
The benchmark FBM KLCI ended at 1,616.64 points, 17.55 points lower than Friday’s closing.