KUALA LUMPUR • A tumultuous year for the Malaysian ringgit shows the volatility that can occur when domestic upheaval collides with shifts in global markets.
The best-performing emerging-Asia currency in the first three months of 2016 has become the worst this quarter after the state-run 1Malaysia Development Berhad (1MDB) fund defaulted on a bond. International forces may yet win out: With political risks in Malaysia subsiding, the door is opening for the ringgit to rejoin a global rally in currencies of oil-producing nations.
The ringgit's top forecaster, ING Groep, sees a 10 per cent jump by Sept 30, based on prices yesterday, after the election victory of Prime Minister Najib Razak's party in the key state of Sarawak suggested the 1MDB controversy had not shaken his hold on power.
"The currency is very undervalued and still has room to appreciate," said Mr Tim Condon, head of Asia research at ING.
He predicts the ringgit will strengthen to 3.72 per US dollar by the end of September and 3.66 by year-end. Its 5.4 per cent drop this quarter was spurred by the 1MDB crisis and signs the United States is moving closer to raising interest rates.
The currency fell as much as 1.1 per cent yesterday to a 10-week low of 4.1298 per dollar and traded at 4.1208 as of 2:06 pm in Kuala Lumpur. It was trading at 2.9791 against the Singdollar.
1MDB, which is at the centre of international probes over money laundering and embezzlement, reiterated to bondholders on Monday its commitment to resolve a dispute with Abu Dhabi's sovereign wealth fund that led to the debt default last month.
Standard Chartered says the trajectory of US borrowing costs will be key to determining the Malaysian currency's performance.
Analysts at the bank, which gets more than half its revenue from emerging markets, do not expect the Fed to raise rates this year, unless US data improve enough over the next few months to warrant one increase. As a result, it sees the ringgit appreciating to 3.95 per US dollar by the end of the third quarter.
"The Malaysian ringgit will be an outperformer in the region over the medium term," said Mr Divya Devesh, the bank's Singapore-based foreign-exchange strategist for Asia. "The primary drivers are going to be what happens to oil prices and what happens with the Fed and the dollar. Anything else is really secondary."
Even with its loss since the end of March, the ringgit is still the biggest gainer among regional peers in 2016 after the yen, following a 10 per cent advance in the first quarter. And the currency is the most correlated with oil prices since 2012, suggesting it has every reason to reprise the appreciation.
The third-best ringgit forecaster, BNP Paribas, sees limited gains for the currency because risks to the global economy undermine the prospects for oil to keep climbing from its 12-year low in January.
And while speculation is building that the Fed Reserve is getting ready to raise rates, the ringgit is not any more exposed to higher US borrowing costs than its counterparts elsewhere in the developing world, according to Mr Condon.
"It could be a big factor for all emerging-market currencies but I don't think the ringgit stands out as especially vulnerable," he said. "The noise around 1MDB will dissipate and the weakness that we've seen in May will reverse."