Highlights

• The Malaysian Ringgit hit a new low of RM3.77/US$ yesterday. This was the weakest level since the previous low at RM3.73/US$ recorded during 2008/09 Global Financial Crisis. The recent renewed expectation of a rate hike by the US Fed by end-2015 due to improved data and a series of unfavourable domestic data and newsflow put more stress on the USD-MYR exchange rate.
• From the macro perspective, a combination of short-term factors will continue to put pressure on ringgit:
  • 1) Divergence in monetary policy stance among major economies. Latest US economic data suggested that economic recovery is back on track, giving the US Fed more ammunition to start raising rates in 2H15 and fuelling the US dollar to a 13-year high. Meanwhile, both the euro zone and Japan continue to embark on massive quantitative easing. On the flip side, developing economies are losing growth momentum, requi ring continuation in loose monetary policy to avoid a protracted slowdown.
  • 2) Exposure to commodi ties, particularly oil & gas. Countries with commodity exposure are subject to waning prospects on growth, current account and government revenue. Despite chalking up a better-than-expected 1Q15 GDP growth and CA surplus of 5.6% and RM10bn respectively, Malaysia is still perceived to be a net exporter of commodities (i.e. LNG, palm oil and crude oil ). Meanwhile, oil-related revenue (30% of government revenue) is expected to deteriorate due to lower oil prices while collection from GST is still uncertain at this juncture to fill up the oil-revenue gap.
  • 3) Potential sovereign credit rating downgrade by Fitch Rating despite resilient economic fundamental and sound financial system. We understand that Fitch has recently completed its Malaysia round and is in the midst of preparing its country review. As flagged in its earlier statement in March, we believe Fitch is still concerned on Malaysia’s external liqui dity (exposure to falling commodity prices and capital outflows) and weak governance issue related to 1MDB debt.
  • 4) Other domestic issues such as 1MDB and political glitches. 1MDB’s fi nancial position has become “a source of market unc ertainty” despite ongoing investigations by the Public Accounts Committee (PAC) and BNM.
• In the short-term, we believe MYR is likely to remain under pressure as we expect the factors listed above (global monetary policy divergence, oil price, Fitch downgrade & 1MDB) remain unchanged and unresolved. As MYR is more sentimentally driven amid volatility in the global financial market, we widen our MYR forecast range to RM3.55- 4.00/US$ (previously: RM3.55-3.70/US$), with full-year midpoint average forecast of RM3.70/US$ (previously: RM3.50/US$).
• Putting fundamental aside, there is still room for ringgit weakness if MYR were to track solely on US$ strength. Since July 2014 (start of US$ rally and oil price decline), US$ index (DXY) has appreciated by 20.5% while MYR only weakened by 15.0%. A depreciation of MYR at parity to DXY appreciation will put MYR rate at RM3.86/US$.

Source: Hong Leong Investment Bank Research - 9 Jun 2015