This Week’s Top Headlines

i) RHB Research states that it is entirely possible for the ringgit to fall to RM5.00 against the US dollar in the next few months. This alarming prediction was raised when the greenback broke past its target price of RM4.60 on Thursday.

ii) The ringgit’s weakness was evident not just in relation to the dollar’s strength, but also when compared to other currencies. Our local note plunged to an all-time low against the Singapore dollar on Friday, at RM3.428.

*Due to the substantial length and complexity of the topics, I’ve decided to segregate this week’s newsletter into two parts. Part I focuses on the dollar versus the ringgit, while part II will talk about the Singapore dollar.

Patrons will receive part II by Monday (May 29).

Scroll down to read the details.

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RHB Research: RM5.00 per US dollar is in the cards

It has been a disastrous week for the ringgit, and worse for Malaysians’ confidence in the local note.

In the past 20 days, the US dollar rallied to RM4.638, a 6-month high against the ringgit, with relentless upward momentum. It is up 4.57% since Bank Negara Malaysia (BNM) surprised the markets with a 25-bps Overnight Policy Rate (OPR) hike.

RHB Research has issued a stark warning. Given the current weakness, the firm believes that there is a realistic possibility of the ringgit reaching RM5.00 against the greenback in the medium term.

If you observe the DXY chart, which compares USD to a basket of other currencies such as euro, yen, and yuan, you’ll see that it is the dollar that is strengthening, resulting in the weakness of the ringgit.

The ringgit itself has also been declining.

Our local note has slumped compared to our Southeast Asian counterparts, with the Singapore dollar hitting an all-time high of RM3.41 on Thursday.

Economist Sani Hamid believes that this is due to foreign net selling of assets.

It's important to note that currencies fluctuate due to supply and demand.

Many factors affect this balance, but it mainly comes from the interest rates set by central banks.

The higher the interest rate, the stronger the currency (in a simple sense, at least).

Imagine a scenario of two banks offering fixed deposits.

Bank A provides an interest rate of 3.0% per annum, while Bank B offers a more attractive rate of 5.25% per annum. As a customer, where would you place your money?

Most certainly bank B, as the higher interest rate makes it a more enticing option for deposit placement. This is a simple reason why higher interest rates tend to drive greater demand for a particular currency.

In the past year, the Federal Reserve has engaged in its most aggressive tightening campaign in 4 decades.

Interest rates in the US were raised 10 consecutive times, from 0.25% to 5.25% in just 14 months.

When compared to Malaysia, it’s plain to see why our ringgit has weakened significantly. Though Bank Negara Malaysia (BNM) has raised the Overnight Policy Rate (OPR) five times in the past 12 months, it is nothing compared to the pace of the Fed.

Why is the US hiking rates?

Inflation.

America's overall CPI jumped to a 40-year high of 9.1% in June due to the pandemic and the Ukraine war.

Supply chains were heavily disrupted, and prices soared through the roof.

More recently, uncertainties in the Fed’s future rate hikes have surfaced again, despite inflation cooling. In its recent minutes of meeting, the committee was split on whether to pause rate increases while inflation remains at multi-year highs.

“Bank Negara Malaysia should have hiked rates faster to strengthen the ringgit.”

This is a valid argument, but you must understand that unlike the Fed, BNM cannot raise the OPR too quickly, or the rakyat will suffer and Malaysia will fall into a deep recession.

RHB Research says that to bring the ringgit back to the RM4.40-4.60 range, the OPR needs to be hiked to 3.75%.

If this was realized, businesses and homeowners would struggle to repay their existing floating loans, causing a wave of defaults across the country.

Already, the rakyat is suffering from BNM’s OPR hikes. According to the founder of RinggitPlus, Hann Liew, every 25 bps increase in the OPR adds an additional RM35 to a floating loan principal of RM250,000.

Hann also said that, apart from the difference in interest rates between Malaysia and the US, the issues faced by Malaysia are threefold.

In a private conversation, he explained that BNM’s mandate is to tackle inflation, not to strengthen the ringgit.

With the recent inflation print recording a lower figure compared to the prior month, he expects it to moderate below 3.0% next month, which gives BNM less room to hike rates.

Are there any solutions to this crisis?

Hann holds several unconventional opinions that he believes could effectively address the weakness of the ringgit.

In the short term, Hann suggests a slight increase in the Overnight Policy Rate (OPR). He points out that before the Global Financial Crisis (GFC), the OPR was at 3.5%, and even before the COVID-19 pandemic, it reached 3.25% in certain periods.

Hann also proposes encouraging locals to repatriate funds by implementing favorable tax and investment policies specifically targeting inbound tourism. He highlights that tourism played a significant role, accounting for 10% of the economy before the pandemic. However, despite some recovery, it has not yet returned to pre-pandemic levels, unlike many other countries.

Looking at the long term, Hann suggests reducing subsidies for the wealthy, while reframing it without using the term "T20." Instead, he recommends redirecting those funds towards cash transfers for those in need, ensuring a more equitable distribution of resources.

Furthermore, Hann advocates for a shift away from Malaysia’s overreliance on oil. He emphasizes the importance of diversifying the economy beyond oil by leveraging sectors such as Electronics and Electrical (E&E) and chemical exports. This would require a strategic restructuring of the economy while capitalizing on existing strengths.

How will the weakening ringgit impact me?

• Imported goods will go up in price.

• Confidence in the ringgit will decline.

• Traveling overseas will be more costly.

• Foreign investment opportunities will be more expensive.

That’s all for Part I of this week’s newsletter!

Part II, which covers the Singapore dollar’s recent surge, will be sent to all patrons by Monday (May 29).

*This newsletter was written at 11.30 AM on 28th May 2023 and completed at 4.50 PM the same day. To get early access to our newsletter, be our patron for as little as $1/month!

Disclaimer: The information contained in this newsletter is for informational and educational purposes only. Nothing herein shall be construed to be financial legal or tax advice. The content of this newsletter is solely the opinion(s) of the publisher.