Ringgit heading towards 24-year low on oil price slide

Malaysia's ringgit is headed towards a test of support at its 2017 low as oil prices slide, opening the door to the currency tumbling to levels last seen during the Asian financial crisis.

The ringgit has been in steady decline since the first quarter - even as prices for the country's commodity exports rose through much of this year - leading analysts at Goldman Sachs Group to suggest that some companies have kept export proceeds in foreign currencies.

The currency is looking even more vulnerable now, with crude and palm oil prices dropping sharply from their 2022 highs in recent months.

Any further decline in crude or a deterioration in risk sentiment over the coming weeks may sweep the ringgit down with it, according to foreign exchange strategist Qi Gao at Scotiabank in Singapore.

The ringgit touched 4.481 versus the US dollar last Friday, the lowest since January 2017. At closing yesterday, the Malaysian currency traded at 4.485.

Against the Singapore dollar, the ringgit was trading at 3.215, up 0.35 per cent from last Friday's close.

Then there is the faster pace of interest rate hikes in the United States, and Malaysia's vulnerability to fund outflows.

While the nation has seen equity inflows this year totalling US$1.82 billion (S$2.54 billion) up till last Thursday, it cannot be taken for granted that they will continue.

"The likelier determinants of dollar-ringgit movements are portfolio flows, rather than trade," said Mr Galvin Chia, an emerging-markets strategist at NatWest Markets in Singapore.

Another bout of broad-based risk aversion and large portfolio outflows could drive the ringgit to 4.50, he said.

A breach of 4.5002 would take it back to lows seen in January 1998.

In a report yesterday, Malaysian market research firm MIDF Research noted that the recent policy easing by the People's Bank of China, combined with slowing growth, also contributed to the depreciation of the ringgit.

China yesterday cut its key lending rates, one week after slicing two other key interest rates to support weakening demand.

In contrast, Malaysia's central bank has increased its benchmark rate twice this year, in increments of 25 basis points, and there is the prospect of further hikes.

Bank Negara Malaysia raised rates to 2.25 per cent last month, the second interest rate hike this year.

Still, this pales in comparison to the United States Federal Reserve, which has lifted its key rate by 225 basis points this year and is set to keep moving higher in large steps.

In the week ahead, the US dollar is liable to get a boost from any strengthening of hawkish rhetoric from Fed officials.

The greenback was already at a fresh five-week high versus major peers yesterday after more Fed officials flagged the likelihood of continued aggressive monetary tightening ahead of the central bank's key Jackson Hole symposium on Thursday.

A ringgit rally will likely require Malaysian inflation figures due this Friday to come in far above expectations.

BLOOMBERG