MYR likely to remain vulnerable on Trumpflation and CNY depreciation despite rising oil prices, says Scotiabank

The Malaysian ringgit is expected to stay vulnerable to market concerns on hovering Trumpflation risks and continued depreciation of yuan, even with increasing oil prices, noted Scotiabank in a research report. Crude oil prices rose sharply over 9 percent on Wednesday as the OPEC reached its first agreement to lower production in eight years. But it was not successful in stimulating the Malaysian ringgit significantly, hinting at continuous downward pressure on the local currency.

The Malaysian central bank, on 30 November, said in a report that the MYR weakened against the U.S. dollar because of market expectation of an impending U.S. policy rate rise by the end of this year and worries regarding the CNY depreciation that resulted in higher risk aversion towards regional financial markets.

Rising U.S. inflation expectations stemming from U.S. president elect Donald Trump’s pro-growth stance have triggered capital outflows from the region including Malaysia. Overseas investors trimmed their positions in local shares by USD 111 million in the week ended 25 November after offloading net USD 261 million in the prior week, said Scotiabank.

The Malaysian central bank has promised to stabilize local markets if required. Earlier this week, Governor Datuk Muhammad Ibrahim stated that the BNM is continuously monitoring speculative activities on the MYR. The very same day, Second Finance Minister Datuk Johari Abdul Ghani confirmed that the government would not peg the local currency and would not raise the interest rate to attract foreign investments.

If Malaysia keeps an open capital account without imposing capital controls and refrains from hiking rates to improve the yield advantage, USD/MYR pair is expected to continue to face upward pressure as the Fed continues to be on track to hike its benchmark rates, according to Scotiabank. Moreover, the spillovers of the yuan depreciation and the status of the MYR as a potential proxy of the yuan cannot be ignored.

Meanwhile, the possibility of ECB QE tapering is negative to EM Asian currencies including the MYR. The Malaysian central bank is likely to keep its overnight policy rate on hold at 3 percent in the coming months amidst market unrest to help defend the MYR in spite of the country’s benign inflation outlook, stated Scotiabank.

“We are still bearish on the MYR and look to buy USD/MYR on dips with a target of 4.60 in the weeks ahead”, added Scotiabank.