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Tuesday September 20, 2011
Ringgit down on Europe debt crisis impact fears
By CHOONG EN HAN
PETALING JAYA: The ringgit slumped to its lowest range against the US dollar this year, as a combination of external headwinds in the eurozone and the United States continue to weigh in on Asian currencies across the board.
The ringgit weakened 1.09% to 3.1157 against the US dollar from 3.0820 last Friday as investors fled emerging markets on fears that the contagion risk of Europe's sovereign debt crisis might slow global economic growth and hurt the economies of export-based developing countries. The local unit had lost 1.98% of its value from a week ago.
Regional currencies were broadly lower with the rupiah leading the pack, with a 1.02% decline. Similarly, it was 2.58% higher a week ago.
“The weakening move started last week when the contagion fears finally spread to the Asia foreign exchange and local bonds market. Previously, the equity outflows seen in Asian had been recycled back into Asia bonds and foreign exchange. Such move (weak Asia foreign exchange) might continue as long as global uncertainty persist,” he said.
All eyes would be on the next Federal Open Market Committee (FOMC) meeting later this week, he said, adding that the near-term outlook was bearish for Asian currencies.
The two-day extraordinary FOMC meeting would be the most important event of the week as the Fed decides on the direction of the US monetary policy amid a staggering global economy that is slowly moving into stagnation.
“The ringgit has moved from 2.96 in early September, broken 200-day moving average at 3.03 and spiked to 3.11 in the last two weeks. The risk is for the ringgit to test previous highs of 3.16. Longer term, we like the ringgit on domestic fundamentals, but it is hard to fight the near-term upside move driven by lack of market confidence rather than a deterioration of Asian economies,” Chong said.
However, he said, the contagion had started a while ago in the equity markets but the local bond market had been relatively immune as investors sought yield enhancement and also the benefit of currency appreciation.
“With uncertainty accelerated in recent weeks, the markets have taken profit for fear to be the last one out,” he said.
According to Chong, the five-year MGS yield on Friday had gone from 3.19% to 3.48% in one week, and the spread between the five-year MGS and US Treasuries was now at 260 basis points (MGS 260bp higher) and it was the highest since March 2009 (317bp recorded).
He said there had been a sell-down in the Indonesia and Thai bond markets as well.
CIMB currency strategist Suresh Kumar Ramanathan said the external factors had stepped up the global risk aversion and the moves of central banks closely mirrored what had happened back in 2008.
“In the past two weeks, the markets still believed that there was still growth in the emerging markets. However, things have not been improving and external headwinds are eroding confidence,” he said.
He said the concern was still on mature developed money markets where their central banks were closer to easing monetary policy to boost liquidity, and the next action of easing rates.
Meanwhile, Tan Chee Wee, head of fixed-income research at Maybank Investment Bank Bhd, said there had been three days of sell-off in the bond market last week.
“I would say it is more of profit taking rather than economic worries as there have been three months of rally and the yield is already looking flat,” he said, adding that the sell-off was more towards domestic players relinquishing their positions, and while there were foreign players selling, there were also foreign players buying.
Source: The Star
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