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Ringgit faces more volatility with US trimming of QE [25-06-2013]  
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The ringgit is facing more volatility with the impending unwinding of quantitative easing by the US, market analysts said.

The ringgit yesterday closed weaker against the US dollar at 3.2180/2210 against Friday's close of 3.2020/2050.

According to Alliance Research, the ringgit was among the top losers year-to-date, depreciating 5.1 per cent from the beginning of 2013 and 8.4 per cent from its peak of 2.96 per US dollar in early January.

"The sharp depreciation was in line with falling regional currencies, triggered by the influence of a stronger greenback after the recent Federal Reserve (Fed) announcement of the impending unwinding of quantitative easing," Alliance Research chief economist Manokaran Mottain said.

He expects the ringgit to trade between 3.15 and 3.25 over the next three months, in line with the expectation of a stronger greenback resulting from improved US outlook as well as anticipated short-term correction in the regional bourses, including Bursa Malaysia.

Mottain said Fed chairman Ben Bernanke's hint last week that the Fed would likely trim its quantitative easing progressively and end it by mid-2014, would see a further strengthening of the dollar.

"The key risk now is that shallow financial markets will amplify any tapering of the QE by the Fed," he said.

He added that the other downside risks include failure of the US unemployment rate dropping below 6.5 per cent, worsening of euro debt crisis and further moderation in economic growth among the emerging markets.

Alliance Research has revised its outlook for the ringgit to 3.12 by year-end from its earlier forecast of 3.03 per dollar.

It also expects some form of intervention from Bank Negara Malaysia to stabilise the volatility in the local currency.

AmResearch equity market economist Patricia Oh has also reviewed the projection of the ringgit to dollar to RM3.12-3.15.

"Despite the resilience in terms of domestic fundamentals, Malaysia remains susceptible to threats of the unwinding of the QE," she commented.

During the first half of June, total foreign reserves declined by 0.4 per cent from May 31 to US$140.8 billion (RM451.9 billion).

Regional markets had also undergone a correction last week and may stay lacklustre until the QE unwinds completely.

When the QE2 ended in 2011, the FBM KLCI corrected close to 263 points (or -20 per cent) from July 7 to September 26 while the ringgit fell by 8.3 per cent from the high of 2.939.

"We anticipate continued weakness for the ringgit until the QE unwinds completely in mid-2014."

Further downside risk for the ringgit is likely, considering the size of the recent QE and thus the retraction of the QE could result in substantially huge outflows of funds from Malaysia as well.

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