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Ringgit strengthening against fragile USD

Posted by tammy on May 10, 2016
| 0

By FXTM Chief Market Analyst Jameel Ahmad | Posted on


THE fragile USD changed the balance of power with emerging market currencies, with both the Indonesian Rupiah and Malaysian Ringgit strengthening against it.

April brought headwinds for the USD, which weakened against its main rivals mainly on the lack of buying impetus and underlying investor scepticism towards the Federal Reserve’s dovishness. The USD declined overall against the Euro, which rose to a high of 1.1446 and held above the level of 1.1226 for most of the month.

As expected, Crude Oil continued to rebound following the rise above the psychologically-critical level of $35 seen in February. OPEC’s failure to reach a deal on limiting global Oil supplies put a small dent in the recovery, but since this was also expected, Oil bulls quickly gunned through the dip to rise over $42 per barrel.

As an indicator of safe-haven buying, the Gold price went through a volatile time in April. The price fluctuated between $1225 and $1260, plummeting by $35 in the first half of the month and then rising by $30 in the second half. Caught between a weaker USD and uncertainty over the direction of global stocks, investors went through spates of risk-off, risk-on behaviour that clearly impacted the Gold price.

The GBP performed better in April after its rapid fall in March on Brexit fears. Those concerns eased off quite a bit on the back of a stronger showing in the polls for the ‘stay-in-the-EU’ camp. As of mid-month, the GBPUSD staged a tentative recovery, rising from a low of 1.4020 to a high of 1.4634.

The Indonesian Rupiah built on the strength it found in March, supported by various moves by Bank Indonesia (BI) signalling monetary easing in the months ahead. In August, BI plans to switch to a new benchmark rate of 5.5 percent instead of the previous reference rate of 6.75 percent. The intention is clearly to stimulate investment, and complement stimulus packages from the government to improve domestic sentiment. The USDIDR saw a low of 12,963.7 and a high of 13,436.3, which was a mixed result, at least when compared to the government’s expected range of 13,300-13,400.

With the commodity markets and particularly the price of oil sustaining their rebound throughout April, the Indonesian Rupiah has moved into positive momentum and is recovering and rebounding from its significant losses throughout 2015.

The rebound in the currency will also improve domestic sentiment, which is equally important. The stronger currency can encourage further purchasing power from local consumers, and consumption on the ground is needed when the economy is expected to encounter slower growth following the dramatic tumble in the price of commodities and a probable decline in trade from China leading to a reduction in GDP expectations.

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