The ringgit extended its losses to end weaker against the US dollar on15 May 2023 following worries over the slowing global economy, said an economist. Is this true?
The local currency fell to 4.4960/4.4985 versus the greenback and was at MYR4.53 to USD1 on 18 May 2023 (2.21 a.m).
Bank Muamalat Malaysia Bhd chief economist said the ringgit pierced through the 4.5000 level because of concerns about uncertainties over the US debt limit appeared to be taking centre stage with investors remaining cautious.
It depreciated against the euro to 4.8863/4.8890 from 4.8839/4.8915 at the close on 12 May and eased vis-a-vis the British pound at 5.6169/5.6200 versus 5.6082/5.6169 previously but rose against the Japanese yen to 3.3010/3.3031 from 3.3233/3.3290.
Similarly, the local currency traded mostly lower against ASEAN currencies.
The ringgit weakened vis-a-vis the Thai baht to 13.3045/13.3174 from 13.1658/13.1922 on 12 May’s close and declined versus the Indonesian rupiah to 303.6/304.0 from 303.4/304.1. It had also slid to 3.3592/3.3616 against the Singapore dollar compared with 3.3552/3.3609 last Friday but was almost flat against the Philippine peso at 8.02/8.03 from 8.02/8.04.
Some suggest, it is the U.S. debt ceiling, others say it is the Industrial Production Index, or that the 5.6% GDP growth in the first quarter of 2023 was not just good enough to stem the slide. Exchange rate depreciation stem from several reasons, as explained previously in an earlier article.
The above graph shows the impact of inflation and the resultant central bank interest rate hikes. To stem inflation, the Fed and BNM have been working overtime in raising key interest rates. So, the Fed Fund rate from near zero in 2021 has moved to 5% by 2023. Similarly OPR moved from 1.75% to 3% in 2023. The differential between OPR and Fed Fund rate of 1.67% has turned negative 2.08% by May 2023. What does that mean? U.S. rates are more attractive than Malaysian ones, so funds have moved to the U.S. This is how interest rate arbitrage works. The result – ringgit depreciated with ringgit sold for USD.
How can BNM stem this? It will need to move the OPR close to the Fed Fund rate or above domestic inflation. This is not possible because growth will be affected? That’s the general paradox. But BNM could do better to reduce the differential (OPR vs Fed Fund rate) and completely annihilate inflation. Some businesses and consumers will scream. But that’s the price for killing inflation and halting exchange rate slide.
Turkey follows a growth over inflation strategy. In other words, interest rates are kept low and inflation roars above 50%. The result, USD1 in 2023 is 19.68 TL (Turkish lira) on 16 May 2023 compared to USD1 to TL 1.45 in Nov 2006. Are we keen to follow this model? Imported inflation will destroy us even if growth is above 8%.
Where will this end? The long-game for importers or exporters is a stable exchange rate regime. Confidence, stability and narrowed interest rate differential should keep us in the RM4.20 – RM4.50 range to the USD. Can we do that?
Reference:
Ringgit ends lower versus greenback on recession fears, Bernama/FMT, 15 May 2023
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