UK – Monthly GDP

The GDP for the UK contracted by -0.3% m/m in Apr’22, a sharper decline relative to -0.1% m/m decline back in Mar’22. Three out of four key sectors recorded a decline, where the production sector declined by -0.6% m/m, construction declined by -0.4% m/m, and the services sector declined by -0.3% m/m. Only the agriculture sector grew 0.2% m/m, but the pace was much slower relative to the previous two months.

Within the services sector, the main drag was spending in the human health and social work activities. This was due to policy changes on COVID-19 containment measure, which was less stringent than before. Despite the increasing prices for goods and services in the UK, the largest positive contributor to the services was wholesale & retail.

Output in production also fell, where the largest decline came from the manufacture of computer, electronic and optical production. Prime reason for the fall was due to a higher input costs and energy prices.

Households and businesses’ main concern at the moment is inflation, where the latest number stook at 9.0% in Apr’22. The inflation situation is unlikely to recede anytime soon, as latest energy prices in the UK are still high. For example, retail petrol pump in the first week of June’22 was £1.76/litre, which is 6.0% higher relative to May’s average price, and 28.5% higher relative to the average price back in June’21.

We expect the Bank of England is going to make another 25bps in the upcoming meeting on 16 June, pushing the bank rate to 1.25%.

Malaysia – Our View on Ringgit

Risky assets will continue to show instability. In this unstable risk environment, the dollar’s risk balance is skewed upside. And with the Fed’s tightening cycle being factored in, it has limited divergence between Fed’s communication and market expectations.

Hence, we do not foresee any risk related to a dovish re-pricing for the dollar. The Fed has endorsed the market’s hawkish pricing. Our argument on the Fed’s tightening cycle is based on solid foundations with 'household balance sheets are in great shape.

But along the way, we expect some dollar pull back, more so in 2H22. It will happen when the tone shifts from inflation and Fed’s aggressive tightening to slower economic growth, raising concern the Fed will pivot away from its aggressive hawkish tone.

For now, we believe the dollar gain is certain against high-beta currencies. We expect the DXY where low yielders weigh more should consolidate around 100-101 levels end 2022 (95.7 in 2021).

MYR

Looking at the ringgit, it fell by 5% YTD. The currency is still hovering near its two-year low it reached 4.40 level in mid-May 2022. Weakening trend on the local currency remains in the near term, can hover between 4.40-45 against the USD due to yuan weakening and dollar strengthening.

The current weakening of the ringgit can be viewed as temporary. It is due to a combination of factors. The continued tightening of global liquidity from the aggressive monetary tightening led to investors reallocate funds to higher-yielding assets denominated in US dollars.

And China’s zero covid policy has slowed down the Chinese economic performance. Fiscal stimulus combined with monetary easing that is widening the interest rates differential is weakening yuan. This has affected Malaysia-China trade and ringgit which tracks closely with yuan.

Nonetheless, we expect the ringgit to strengthen in the 2H of 2022. The strong economic fundamentals, prudent ringgit management, capital inflows into equities and the pricing-in of the US rate hikes as well as new noises of potential economic slowdown in the US would see the dollar exhibit some pullback.

Besides, Bank Negara Malaysia will continue to actively manage the ringgit to ensure that fluctuations are orderly and not excessive. This will allow the economic sectors to make investment and expenditure plans based on a more stable value of the ringgit. We expect the ringgit to hover around 4.20 - 4.25 levels by end 2022.

Source: AmInvest Research - 14 Jun 2022