Outlook on the Malaysian ringgit

Today we will have a look at the currency of the third-largest Southeast Asian economy – Malaysian ringgit. The ringgit as all emerging market currencies suffers a great depreciation because of the strong US dollar. On August 10, the USD set new highs at levels of July 2017. As a result, most of the currencies appeared under great pressure again. Does the Malaysian ringgit have chances to appreciate in such an environment?

It’s not a secret that to fight with the USD, the currency needs strong support. However, the ringgit is bad at that. According to the recent release of the industrial output data, chances for the ringgit are vanishing.

Industrial output growth pace in June declined the most in more than 4 years. The fall in mining activities caused a slowdown. Such data signals a moderate growth in the second quarter that brings risks of a slower extension in the upcoming months. Trade wars tensions are anticipated to keep affecting the Malaysian economy. According to an assessment of Deutsche Bank, the Malaysian currency is among the most sensitive to external shocks.

The market will look at the GDP data that will be released on August 16. Such authoritative financial institutions as Nomura and Barclays forecast a decline in the economic growth in the second quarter. Barclays bets on the dipping below 5%. Nomura anticipates 4.7% year-on-year GDP growth. Such forecasts create risks of the dovish central bank. Whether the central bank keeps the interest rate on hold or cuts it, the Malaysian ringgit will be at bigger risk.

We should mention that purchases of Malaysian bonds by foreigners increased in July. It seems to be a positive signal for the Malaysian economy. A reversal in foreign flows will ease pressure on the Malaysian ringgit. However, according to the forecast of the UOB economist, the strong USD and escalating trade tensions won’t let the ringgit to become stable. A further slight decline is anticipated.

What should traders do?

Although the Malaysian ringgit is anticipated to stay weak, traders have other chances to boost their profit. The USD overperforms. The Fed is anticipated to raise the interest rate at least 2 additional times this year. As a result, traders should take into consideration such highly volatile pairs as EUR/USD, USD/JPY and shouldn’t forget about commodity currencies that will keep depreciating while trade tensions are escalating.

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Darya Bobrova