Based times and it is getting worse day

Topic: FinanceBank
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Last updated: May 30, 2019

Based on the article, ‘What to watch out for in the ringgit’s rise’ from the star online news, the article stated that the US dollar ($) is starting to weaken; hence the Malaysian ringgit (MYR) is in a recovery stage, even though it is recovering in a slow and steady condition because of the headwinds which affect the domestic and global economy. It has been studied that the ringgit is expected not to have any major pressure on further depreciation in the next five months. While any effects of the outflows of the ringgit occur, the gravity of the depreciation of the ringgit is not expected to be great – unless there is some unexpected global economic shock such as a full-blown trade war between the US and China.What made MYR fall? What are the reasons behind the continuous fall of MYR? MYR gained annually for the last time in the year 2012 and since then its values fall dramatically. Though the domestic market of Malaysia and the people who deal in ringgit market might not be affected by the fall in the currency, the people who travel abroad or deal in export-import business are having tough times and it is getting worse day by day. There are several reasons which intrigue the fall in the value of MYR. For instance, the political disturbance regarding the 1MDB’s debt issue,  US interest rate that affects every international market, and MYR get affected by the devaluation of the Chinese Yuan in August 2015.

However, one of the other global concerns that hugely influences the fall in the value of ringgit is Trump’s election as the President of US, which came as a shock to the whole nation and affected many international markets and currencies in a negative manner as there is the anticipation of a slowdown in the global trade and businesses.Now, MYR is in a recovery stage and it also started to appreciate gradually every single year. However, how much more can the ringgit go better against the US dollar? The ringgit appreciates against the US dollar will depend on several indicators such as signs or trends that will provide clues to the future strength of the ringgit. The first indicator that one must look for is whether the current trend of the US dollar continues to weaken or not. It has been seen that the US dollar has started to weaken against the major currencies, such as the European Euro (EUR), British Pound (GBP), Japanese Yen (JPY) and more, in the past few weeks as indicated by the decline in the US Dollar Index. The index, which measures the strength of the US dollar against a basket of currencies, increased to as high as 103.5 after President Donald Trump was elected in November 2016. However, on March 2017, it came down to as low as 97, and at the moment, it is at about parity – which is 100.

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Based on the movement of the US Dollar Index, the ringgit, which went as high as RM4.50 against the dollar at its worst in January 2017, has strengthened against the dollar at the current levels of RM4.42.

Going forward, if the dollar index weakens or remains at its current level, then the ringgit should strengthen over time – to well below RM4.40.Next, the increase of numbers that are coming out of the domestic economy is the other indicator that shows the appreciation of the ringgit against the US dollar. The numbers that are coming out of the domestic economy must keep on improving if the ringgit is to strengthen further. The international reserves have been steady at about US$95bil, while gross domestic product growth is expected to be slightly higher at between 4.3% to 4.8% last year compared to 4.2% two years ago.

Not even that, inflation is also creeping up due to the higher crude oil prices and the removal of the subsidy for petrol. It is even unlikely that Bank Negara Malaysia would adjust the interest rates up, as a higher interest rate is something that the Malaysian economy cannot afford now, considering it is still in a recovery mode. After consideration that the Federal Reserve is likely to raise the rates again at the end of the year, the pressure will be on emerging-market currencies.Furthermore, there is also the current account surplus that has to be closely watched for the appreciation of the ringgit against the US dollar. Malaysia already has a deficit in the Federal Government budget and it cannot afford to have a deficit in the current account as well. The current account is expected to have surplus between 1% to 2% last year. It was used to be 4.

5% in 2014 before the slowdown in the Malaysian economy due to the drastic drop in the price of crude oil. Solutions which had done, such as hiring the services of foreign firms and consultants, as well as allowing more foreign labor to come into the country, does not help to stop the outflow of funds. The outflow of funds due to the engagement of the services of various foreign firms and consultants is expected to be larger than the RM35bil, while the repatriation of money by foreign workers was estimated at RM30bil last two year ago. However, the amount repatriated was only RM17bil in 2008.Moreover, in order for the ringgit to appreciate against the US dollar, the current environment of low volatility in the US dollar-ringgit environment needs to continue to have steady improvement in the domestic currency. The implied volatility of the US dollar against the ringgit is now at levels which are seen in 2014 – before the collapse of crude oil prices.

It was volatile in this past years, but now it has come down substantially, thanks to the measures announced by Bank Negara on Dec 2016. Bank Negara has instituted measures in ensuring an orderly trading of the US dollar to the ringgit in the domestic market, which has helped to reduced 70% of the offshore trading of the US dollar-ringgit foreign exchange (forex) market.Lastly, another indicator that shows the appreciation of the ringgit against the US dollar is the local political situation has to be stable as well as the economic recovery in China.

A stable political scene and China snapping out of its slow economic growth mode would facilitate further inflows of foreign funds into the region. Markets in the region have done well so far this year. Malaysia also has benefited with Bursa Malaysia receiving net inflows of more than RM4bil. The measures taken by Bank Negara on Dec 2016 has really stabilized the volatility of the ringgit against the US dollar and helped improve the demand for the local currency. However, for the ringgit to improve further, foreign funds have to flow into the country, which would certainly be a firm indicator that the ringgit is well on track for a firm appreciation.

In conclusion,  without any major pressure on further depreciation of ringgit, we should be able to see the ringgit to further strengthen again against all the developed nations’ currencies without any unexpected global economic shock. With the ringgit’s gradual strengthening against the US dollar, one could ask what this development means for Malaysia, particularly from an economic or corporate point of view. An appreciation can help improve living standards and it also enables consumers to buy cheaper imports. If the appreciation is a result of improved competitiveness, then the appreciation is sustainable, and it shouldn’t cause any lower growth.


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