FX Research – A tale of misplaced expectations

Good Afternoon!

v In a surprise turn of event, Fitch Ratings has affirmed Malaysia’s sovereign ratings and the outlook has been upgraded to ‘Stable’ from ‘Negative’. This goes against its position that Malaysia’s credit ranking sits ‘more naturally’ in the BBB range with a likelihood of ratings downgrade then.

v Asset markets have reacted positively to this news. However, this relief rally needs a close monitoring as equity selling by foreign institutions yet to sign of peaking, persistent market cautiousness as reflected in the 5-year credit default swaps especially with build-up in inflation expectations, risk of financial imbalances and weak external reserves coverage. Political noises are not helping as well.

v Ringgit Malaysia will likely to be caught in changing external cross-currents as we are entering crucial period for US dollar over improving US data flows and expectations of when the Fed FOMC will ever raise rate along with hardening of market expectations of first hikes in September.

v As this event risk is out of the way, we expect that volatility on local currency is likely to ease. Extreme expectations on Ringgit Malaysia, which at its height of pessimism pointing towards 4.00-4.50 against US dollar, will be deeply buried.