Ringgit volatility expected to slow down due to OPR hike

KUALA LUMPUR: The Ringgit continued to weaken over the past week against the US Dollar as the portfolio outflows continued – especially from the bond market as investors adjusted their portfolios to factor in a potential acceleration in interest rate hikes by central banks in the face of stubbornly high inflationary pressures.

The local currency slipped by another 4.3sen (1.0%) over the week against the US Dollar to RM4.3900 / USD1.00 which is already edging closer to its previous 23-month high of RM4.4130 in March 2020.

However, I am expecting the volatility to slow down somewhat in the coming week following Bank Negara’s OPR hike and therefore I am expecting the Ringgit trade between RM4.36 to RM4.42.

The Ringgit remained more or less unchanged over the past week against the British Pound at RM5.390 / GBP1.00 but weakened against the other major currencies such as the Japanese Yen, Euro and Singapore Dollar at and RM3.3990 / JPY100, RM4.5791 / EUR1.00 and RM3.1576 / SGD1.00 respectively.

MARKET

The local stock market continues to be on its back foot last week as investors continued to remain in risk-off mode in light of the unexpected interest rate hike by Bank Negara at its May 2022 MPC meeting.

The prospect of faster interest rate hikes to combat inflationary pressures continued to haunt the equity markets throughout the world with all the major regional markets except Shanghai ending the week between 1.2% - 11.0% lower. The benchmark KLCI Index ended the week at 1,544.41 points (-19.93 points or -1.27%).

Going forward, I am expecting the market to continue consolidating in the absence of any market moving catalysts and short-term direction will be determined by specific industry or company news flow.

Over the next three weeks, all the corporates will be releasing their 1Q22 results and investors will be taking cues on the forecast of business conditions for the rest of the year from the management.

The key support level would be at 1,500 points while the 1,600-point level will continue to be the psychological barrier that the market will head towards in the event of a rebound.

Meanwhile, Malaysia’s bond market also experienced a broad sell off as the yields of Malaysian Government Securities (MGS) continued to rise in response to the interest rate hikes by both the US Federal Reserve and Bank Negara Malaysia.

Bond yields for both the 10-year US Treasuries (UST) and 10-year MGS yields continued unabated into May 2022 to 2.90% and 4.44% as at 13 May 2022.

The yield spreads between the two 10-year bonds have narrowed slightly to 154bps from 159bps & 171bps in March 2022 & February 2022 respectively.

Inflation in the US for April 2022 remains uncomfortably high at 8.3% on a year-on-year basis after peaking at 8.5% y-o-y in March 2022 which is the highest since 1982.

Americans saw huge increases in prices for food – especially meat, poultry, fish and eggs whose prices surged 14.3%, the highest since May 1979. The prices of other products such as dairy and cereal products also rose.

ECONOMY

Bank Negara Malaysia (BNM) raised the Overnight Policy Rate (OPR) by 25 basis points to 2.00% at its third Monetary Policy Committee (MPC) for the year.

BNM said the sustained reopening of the global economy and the improvement in labour market conditions has continued to support the recovery of economic activities and partially cushion the impact of the Russia-Ukraine conflict and COVID containment lockdown measures in China.

However, BNM said risks to growth remain which includes a further escalation of geopolitical conflicts, worsening supply chain disruptions, weaker global economic growth and a resurgence of COVID-19.

Both the headline and core inflation for 2022 are expected to average between -3.2% to 2.2% and -3.0% to 2.0% respectively. To combat the adverse effects of Covid to the economy, the OPR was reduced by 125 basis points (cumulatively) to 1.75%.

The central bank said the conditions that necessitated such actions have since abated and it will begin reducing the degree of monetary accommodation in a measured and gradual manner to support sustainable economic growth while ensuring an environment of price stability.

BNM also announced that Malaysia’s GDP grew by 5.0% in 1Q22 as compared to a contraction of -0.5% in 1Q21. It expects the domestic economy to grow between 5.3% to 6.3% in 2022 supported by the abovementioned reasons.

MARC Ratings is anticipating Malaysia’s economic growth to strengthen further throughout the next two quarters on the back of supportive fiscal policies, reopening of international borders and the lifting of other pandemic related restrictions. The continued strength of the labour markets will push the unemployment rate lower to 4.0% in 2022 from 4.6% in 2021.

MARC also revised its headline inflation to rise to 2.7% for 2022 from 2.5% in 2021 as intense supply side inflationary pressures continue despite active government intervention. MARC also opines that a second interest hike by Bank Negara Malaysia in the second half of 2022 is highly probable reflecting the central bank’s confidence in the domestic economy’s near-term prospects.

Deputy Human Resources Minister Datuk Awang Hashim said employers with less than five (5) workers have been given a deferment from complying with the Minimum Wager Order 2022 until 31 December 2022.

However, employers involved in professional fields such as lawyers and doctors would still have to adhere to the stipulated minimum salary of RM1,500 for each employee regardless of how many workers they have.