Much has been talked about the Malaysian Ringgit downward movement against the US Dollar. As to date MYR is the worst performing currency against USD in the Emerging Market (EM) space, comprising of countries in the regions of LATAM, Asia (Malaysia included) and MENA,
Therefore to understand such currency behaviour, I’d gather few notes hoping that’ll be able to clear the confusion on this
One reason explaining why EM currencies behaving dismally versus the USD is due to not a single EM central bank has engaged in quantitative easing (QE) practices, as done by other developed central banks, like the US, Europe and Japan. Similarly not a single developed central bank has bought EM assets as part of their QE programmes.Thus, EM assets along with their currencies, have in effect suffered in a state of benign neglect. Apart from that sentiment also mirrors the destination of QE flows, where the EM countries have experienced a slowdown in their share of financial flows – even outflows in some cases.
The strong USD has also pushed down commodity prices, which has benefitted the majority of EM countries, sans Malaysia, being an oil exporting country. However, in a market that rarely distinguishes between EM countries and tends to focus on the negative stories, even the lower commodity prices have reinforced the EM scepticism. USD rally was predicted based on the view that the US economy would grow faster and that the Fed would hike sooner than the other developed countries. Market has been expecting the hike since beginning of the year. However now the USD has became so strong that, at the margin, it is impending growth and influencing Fed policy in a dovish direction. When the Fed failed to hike the rate in September, of which citing the reason of slowdown in external markets, the USD has become the victim of its own success.
The reason as to why we haven’t seen a rally in EM currencies is due to no serious outright downward pressure on USD; where there is absent in US inflation and also due to volatility of EM FX.
Some positive news for EM currencies..
Firstly, EM currencies are cheap after four years of unrelenting depreciation. Secondly, if the USD now flat-lines, the expected annual depreciation of EM currencies will also be less, probably closer to zero per year than -10% per year of the past few years. Having said that, 2016 is still expected to be benign for EM currencies and bond market, where it is only forecasted to rebound in the year 2017 onwards.