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DIFFERENT INTEREST RATE POLICIES
Maybank chief forex strategist Saktiandi Supaat told CNA that a key factor why the Singapore dollar “has been more resilient” than the Malaysian ringgit in the recent bout of strengthening of the US dollar is because both countries have different approaches in interest rate policies.
The US dollar’s recent momentum has been driven by raised expectations that the Federal Reserve will have to keep interest rates higher for longer to subdue inflation.
“As there is no explicit interest rate policy in Singapore, interest rates are market dependent and highly correlated to US interest rates. Consequently, there is less pressure in terms of yield differentials on the Singapore dollar,” said Mr Saktiandi.
A yield differential is the spread between yields on differing debt instruments of varying maturities, credit ratings, issuers, or risk levels. Generally, when the yield differential widens in favour of a certain currency, that currency will appreciate against other currencies.
Mr Saktiandi explained that Malaysia has an “explicit interest rate policy” set by BNM and as such there is more pressure on the ringgit from the “perspective of a widening yield differential”.
Meanwhile, he explained that the Monetary Authority of Singapore (MAS) monetary policy framework is exchange rate based and is currently set to be on an appreciating path against an undisclosed basket of currencies.
“We think that this framework naturally provides the Singapore dollar with some shelter from bouts of US dollar strength which is what is happening now,” said Mr Saktiandi.
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REASONS FOR THE RINGGIT’S RECENT SLUMP
Analysts stressed that the ringgit’s slump against the Singapore dollar can be attributed to external factors as well as domestic factors related to the Malaysian economy.
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“In November, the ringgit strengthened primarily due to the semblance of political stability post-election. However, it has since depreciated due to external factors such as the (US Federal Reserve’s) highly aggressive interest rate hikes, the US banking crisis and geopolitical uncertainties,” said Mr Afiq Asyraf.
Mr Hafidzi Razali, a senior analyst with strategic advisory firm Bower Group Asia, added the weaker ringgit recently can be attributed to China’s ongoing economic recovery.
“Given that China is one of Malaysia’s largest trading partners, China’s economic recovery is important for the value of (the ringgit),” said Mr Hafidzi.
He noted that Malaysia’s exports had contracted 1.8 per cent year on year in the first quarter of 2023, and that this could largely be attributed to the decline in exports to China.
Domestically, Mr Hafidzi posited that Malaysia’s relatively weaker investment opportunities and impending structural reforms have held back the ringgit’s value.
“Private investment opportunities remain relatively limited; compared to developed economies such as the US and Singapore,” said Mr Hafidzi.
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WHAT LIES AHEAD FOR THE SGD TO MYR RATE?
Analysts whom CNA spoke to added that the value of the Singapore dollar to the Malaysian ringgit could spike to new highs in the near term especially if the US dollar continues to appreciate.
However, some have stressed that the Singapore dollar to Malaysian ringgit value would stabilise given that the US government has agreed to raise the debt ceiling and that Congress would vote on the deal on Wednesday.
Mr Saktiandi said that the ringgit could breach to a new low of RM3.45 against the Singapore dollar if “USD strength continues”.
“In the near term, we do not rule out the possibility that the US dollar to Malaysia ringgit value could still be moving further upwards, given that global sentiment could be subdued for a while still,” he said.
“However, we believe the situation should gradually turn, and we see the medium-term outlook for the Malaysian ringgit as still positive,” added Mr Saktiandi.
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