Malaysia's ringgit eyes worst week since 1998

Salt continues to be rubbed into the wound of the ringgit, with the currency on track for its worst weekly performance since the Asian financial crisis.

It hasn't been the best week to be an Asian currency in general, but the ringgit has fared worst among regional peers. Not content with being down 17.3 per cent year-to-date to Friday the 18th, the currency weakened a further 4.2 per cent this week to Myr4.3868 per US dollar in Asian trade today, writes Peter Wells.

That puts it on course for its worst week since a 4.6 per cent drop in the week ended June 26, 1998. Youch.

The ringgit has had a few bad weeks of late, in excess of -2 per cent, but a drop of 4 per cent or more hasn't happened for a long time. More confusingly, at a basic level, Asian currencies declined this week despite the Federal Reserve deciding last week not to raise interest rates at its September policy meeting in a move that should have led to a weaker US dollar. That said, many currencies had rallied against the US dollar in the lead up to the meeting in case of the old "buy the rumour, sell the fact".

There's little doubt among analysts that the low value of the ringgit is a substantial problem for Malaysia and its policymakers, but there's some variation of opinion about what it might mean for benchmark interest rates in the country.

HSBC notes "the tumble in the ringgit over recent months is likely to have led to a material tightening of financial conditions. Since growth is relatively credit intensive, this is bound to impact demand in the coming quarters."

On the outlook for rates, ANZ analysts expect Bank Negara Malaysia to keep rates on hold, and in "wait and see" mode for the remainder of 2015. They add:

Growth risks –arising from slower private consumption and the knock-on effects of structurally lower prices throughout the oil and gas industry – have diminished the odds of a hike. In fact, hiking rates to defend the ringgit will likely be futile. Easing monetary conditions while allowing currency weakness may appear to be an attractive orthodox policy when growth momentum ratchets lower, especially with counter-cyclical fiscal policy constrained by soft energy prices and 1MDB concerns limiting its flexibility. However, monetary easing will further weaken the currency and possibly exacerbate capital outflows.

Although Capital Economics thinks interest rates will "remain on hold in the coming months, a further slump in the ringgit could prompt the central bank to hike rates." (ft)