Malaysian ringgit likely to suffer from policy uncertainty post the election, to reach 4.10 level: Scotiabank

The Malaysian ringgit is expected to suffer from policy uncertainty post the election, at least at the initial stage. The opposition has pledged to abolish a goods-and-services tax (GST) introduced on April 1, 2015, within its first 100 days in power if it wins the general election, according to the latest research report from Scotiabank. The currency is further, seen to head for and reach 4.10 before long.

The move would lower household living expenses and cool CPI inflation but could raise market concern over the nation’s fiscal conditions and impose upward pressure on the Malaysian government bond yields in our opinion.

In addition, escalating uncertainty surrounding Malaysia’s economic policy could erode foreign investors’ confidence in the nation to some extent. In this election, Sino-Malaysian relations have become a point of dispute between the opposing parties. The opposition’s victory may see a slowdown in China’s foreign direct investments (FDIs) that accounted for about 19 percent of Malaysia’s total FDIs in 2017 in net value.

Further, the rising 10-year U.S. Treasury yield is expected to continue spurring bond outflows from Malaysia. The US Treasury Department auctioned USD25 billion in 10-year T-notes at a high yield of 2.995 percent, the highest yield at the auction since 2014. The bid-to-cover ratio that is an indicator of demand was 2.56, above the average of 2.43 over the past 10 offerings.

The MYR has weakened persistently amid a broadly strengthening dollar since early April, with bond outflows pushing up the 10Y MGS yield in the meantime. In addition, the U.S. dollar index is anticipated to remain supported and to head for the 94.0 level in the run-up to the June 12-13 FOMC meeting, largely due to resumed US-Eurozone growth and inflation divergence.

"Italy’s political uncertainty will likely impose additional downward pressure on the EUR at the moment. Meanwhile, we stay nimble on the possibility of the Trump administration seeking to talk down the dollar. In the medium term, however, we believe the MYR is still undervalued in terms of either the NEER or the REER, particularly if taking into account the nation’s sound fundamentals," the report added.

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