Ringgit Shrugs Off Lockdown in Sign Worst of Losses May Be Over

Ringgit Shrugs Off Lockdown in Sign Worst of Losses May Be Over

The ringgit has greeted the start of Malaysia’s with a show of stability, suggesting any adverse impact from the restrictions may be limited.

The currency was Asia’s worst-performer in May, falling almost 1% against the dollar as the nation’s virus cases rose to a record. However, it never breached the March low of just under 4.16 per dollar and steadied last week around 4.13 despite the start of the lockdown.

Part of the reason is the impact of the recent tightening of restrictions on economic growth is estimated at less than 1%, according to the finance ministry. This is premised on a strategy that targets physical contact-heavy sectors while allowing those that contribute to more than 90% of GDP to operate.

In fact, some suggest the curbs may actually benefit the currency if they widen Malaysia’s trade surplus by reducing demand for imports and exports remain robust. The latter surged 63% in April on an annual basis.

“The lockdown could strengthen the ringgit due to domestic demand compression -- as we have seen previously in the case of the Philippine peso or Indian rupee,” said Trang Thuy Le, Asia FX strategist at Macquarie Capital Ltd. in Hong Kong. The rupee was Asia’s best performing currency last month despite Covid-19 continuing to India.

The bigger near-term risk for the ringgit may be if the government’s $9.7 billion spurs foreign investors to sell Malaysian bonds over fiscal deficit fears.

But even here the impact of the stimulus may be limited. Economists at MIDF Malaysia’s fiscal deficit to be 6.1% of GDP, versus the official government forecast of 6%, after taking the package into account.

“Fixed income outflows could rise in the near term on concern of fiscal deterioration, but we think this should be more than offset by weaker imports during lockdown,” says Le, who sees the ringgit ending this month around 4.12 per dollar.

Rising crude prices could also help support the ringgit given the country’s status as a net oil exporter. West Texas Intermediate touched its highest since October 2018 last week.

Below are the key Asian economic data and events due this week:

    Currency held key technical level at end-of-March lows

    Could benefit from bigger trade surplus if imports fall