Driving forces behind EM currencies

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.





3Q2015 Market Updates

So many things happening in the past 4 months or so.

Here’s the snippets

Market has been crazy volatile in the months of August and September. Lots of bond sell downs in the emerging market space, where and especially malaysia that wasnt spared from it. a combination of global risks, weak inflation and tighter financial conditions encourage the monetary policy heading to year end more dovish that before. on top of that, the emerging market assets have weakened largely due to commodities slump, slowdown in China (growth forecast below 7%?), strength in dollar as well as the possibility of US’ Feds policy tightening

Oil price again plummeted to below $50 level. Coupling that with slowdown in China and devaluation of yuan, have brought ringgit down to 17 years of historical low against dollar. It was crazy.

But as they say, whatever goes up must come down. Now we see market has somewhat less shaky, given that the US’ Feds ‘delaying’ interest rate hike and the market has also managed to price in the rate hike up until 1Q next year. Currently the US dollar position has also calmed a bit that brought ringgit level up a bit.

Brent crude oil hovers at below $50 level which serves as an indicative level for revenue generation forecast for the country. Now analysts are expecting the level will go up to $70 starting only in 2017 onwards. Hence, 2016 continues to be a volatile year.

Expectations from the market:-

  • Further targeted stimulus by PBoC on China stability
  • Abenomics aint working, sorry Mr. Abe. Japan is viewed to be facing a possible relapse into recession. Given that S&P has cut Japan rating to A+ from AA- in September due to economic support for Japan’s sovereign creditworthiness has continued to weaken in the past three to four years. Plus they are also in view that the govt’s economic revival strategy is not able to reverse the deterioration in the next few years.
  • US’ Fed hike by year end, up by 25bps. If not, then by 1Q2016.

Honestly none of analysts and economists I met is positive for 2016, at least for the first half. I’m not seeing any bright spot either.

Weakening Ringgit, Strengthening Dollar

Global and domestic developments are affecting the volatility of Ringgit movement. Global developments would include the investor expectations relating to monetary policies of major central banks and the trends in crude oil and gas prices, where domestic factors include concerns about government linked entities and ratings related issues.

Ringgit has been underperforming against the strengthening US dollar, being Asia’s second worst performer YTD, behind Indonesia, where asian currencies tend to move together against the stronger USD. The pressure on MYR is largely driven by sentiments, rather than fundamentals. The analysts are expecting bad times for the country as well as the whole Asian region, at least until the second quarter is over. For countries under the emerging market space, it seems that only Eastern Europe where the growth has been picking up, but things arent looking that bright in the larger European space, with potential UK and Greece’s exit from Europe. Asia and latin america are both equally been under pressure due to weakening currencies and growth slow down, but on the positive side, most of the Asian countries are benefiting from lower oil price and less inflationary pressure. So yeay to other Asian countries but not Malaysia.

More bad news it seems with Fitch is said to be on track to downgrade the sovereign rating as short term view on Malaysia is not so positive, particularly on the debt ceiling and contingent liabilities. Their next review is due by end of July 2015 and until then, we just hope that the market has priced in the impact. As I talk to few fund managers, they’re currently staying away from our credit papers, due to the foreseeable risk of downgrade and MYR uncertainties.

While external developments are beyond the control of any open economy, every effort needs to be undertaken to bring about resolution to the domestic issues that confront our economy. Once these issues are resolved the performance of the currency is expected to be consistent with our sound economic fundamentals and growth prospects.


Stronger dollar and higher rates

Fed rate normalisation

Most analysts are forecasting an increase in fed fund rate and tightening of US monetary conditions, perhaps by second half of 2015. This move will impact  Asian countries, being the large recipients of QE flows and thus vulnerable to sudden stops in the flow.

Further to this, China slower growth and weak imports, as opposed to US’ stronger import would dampen Asia’s export recovery.


Data from Bank of America Merrill Lynch

 Look where Malaysia is?

On the eastern side, Abenomics have failed to achieve the objectives (the three arrows) and Japan is thus likely to be in deflationary state. With the current state of low oil price, Japan as net energy importer would benefit from it, and BOJ has thus lowered its CPI forecast to 1% which has suggested that further monetary easing would be necessary. Subsequent to this yen is expected to go lower to 130 by year end (source: ABN Amro) and putting downward pressure on prices which in turns may delay their inflation target this year.

US is certainly benefiting from potential rate hike and stronger dollar. As we can see in the recent years there is a continuous upbeat in the US economy.

Certainly there are many more areas to look at, Malaysia for example as the exporter of oil impacted by the fell in oil price which has prompted the government to revise its 2015 budget. Greece crisis and Eurozone issues at large are another angle to look at which certainly have impacts on the global growth this year. On the other hand, Indonesia, India and Philippines are enjoying growth and positive outlook, stemming particularly from the policy revision, rebound in government spending and fiscal reduction pledge by their respective governments.

Strengthening of fiscal policy?

Malaysia’s sovereign risk profile compares poorly to rating peers on the fiscal side. Accelerated by the drop in oil price and weakening ringgit. Being an oil exporting country, it has to absorb a large terms-of-trade shock and face greater fiscal and external vulnerabilities.

Further hike in OPR is expected in 2H2015, probably after the implementation of goods and services tax (GST) in April. Statistically speaking, housing credit has remained pretty stagnant over the last few years, whereas personal loan and vehicle loan are on the rise. I think such unhealthy situation like this wont warrant the central bank to further increase the interest rate this year. Furthermore with the recent implementation of GST, which would normally gives a profound impact to the economy especially within its few months of implementation.

The increase in government’s development expenditure (as announced in the budget 2015) is expected to boost GDP in 2015 due to development expenditure has a higher multiplier impact on the economy relative to government’s operating expenditure.

One thing for sure, 2015 aint going to be a good year for the economy. Say on the currency front, there are analysts who predict that the ringgit might go down to 3.80/dollar level by year end. That is quite a scary possibility. Last week we could see there had been a slight increase for ringgit, 3.62/dollar, but that was expected due to the issuance of the dual tranche $1.5bil sukuk wakalah. By next week the rate could go back down again, we shall see.