Ringgit slide as emerging market currencies fall against US Dollar

The ringgit touched a 52 week low against the US dollar at 3.3567 on Monday, January 27 and the erosion of value of currencies across the globe was a major concern for investors.

One of the worst hit currencies was the Argentinian peso which has depreciated by 15 per cent against the US dollar year to date. The Turkish lira, the Russian rouble and the Indian rupee all witnessed currency declines against the US dollar while the South African rand sank to a 5 year low against the greenback.

According to the Financial Times (FT) , two main reasons cited for the decline in global currencies was the effects of the Federal Reserve’s tapering of its bond buying programme and China facing slower growth in 2014.

The ringgit depreciated against the Singapore dollar to 2.6040/6082 from 2.5969/6000 and eased against the yen to 3.2327/2369 from 3.1903/1944 . It fell against the British pound to 5.5378/5441 from 5.5321/5384 and weakened against the euro to 4.5531/5579 from 4.5395/5442.

HSBC in a foreign exchange report for its outlook on currencies for 2014 said that it expected the ringgit to face headwinds from “ various fronts,” current account surplus, high foreign exposure in local debt market, threat of higher inflation and elevated fiscal burden.

“Bank Negara Malaysia was among the least interventionist of central banks in Asia and we expect the ringgit to be volatile with a depreciation bias,” said HSBC in the report.

HSBC’s year end target for the ringgit of RM3.33 has been breached and the banking group has not revised its target.

Malaysia weakening current account surplus and high foreign holding of government debt at 37.4 per cent of total outstanding debt was a major cause for concern.

While a weaker ringgit, was positive for exporters it would be negative for importers and would be detrimental for the average Malaysian as Malaysia depends heavily on imported food. Malaysians planning to travel overseas would probably have to spend more for their travels.

Malaysia GDP is poised to grow by 5 to 5.5 per cent for 2014 but persistent weakness in the Ringgit may cast doubts on this growth especially if real interest rates turn negative.

A negative real interest rate environment occurs when the inflation rate exceeds interest rates.

In November 2013, the Consumer Price Index (CPI) was at 3.2 per cent and if inflation continues to creep upwards the possibility of Malaysia being in negative real interest rate environment is not too remote.