MNI ANALYSIS: Malaysian Ringgit Has Further Upside To Run

--Bank Negara Malaysia Hiking Cycle To Continue, Underpinning MYR

By Stuart Allsopp

     SINGAPORE (MNI) - Malaysia's central bank looks set to maintain the

currency's positive interest rate differential over the U.S. dollar even as

inflation remains depressed, which should enable the ringgit's bull market to

continue. Despite rallying by around 13% over the past year the ringgit remains

one of the only undervalued currencies in Asia following the broad-based Asian

FX rally.

--CURRENCY TURNAROUND

     The Malaysian ringgit has put in a strong recovery from the panic lows of

late 2016, when Bank Negara Malaysia intervened to ban offshore ringgit trades

in order to quell downside volatility in the currency. A strong recovery in

exports due in part to the recovery in terms of trade has supported the economy

and seen portfolio investment recover strongly, posting three consecutive

quarters of inflows. Over recent months BNM has actually been accumulating

reserves to prevent further currency strength, but this should not present a

significant obstacle to further gains.

--WARY OF LOW RATES

     With BNM hiking its overnight policy rate to 3.25% on January 25, the carry

advantage over the US dollar remains firmly intact even as core inflation rates

remain broadly similar in both countries. While policymakers removed the

emphasis on preventing a build-up of financial risks due to excessively low

interest rates in its March 7 monetary policy statement, our belief is that BNM

still sees this as a risk, even after the latest hike.

     Real GDP growth is on track to exceed 5.0% in 2018, and policymakers are

showing no sign of discontent with the declining trend in inflation, which came

in at just 1.4% y/y in February. Higher nominal and real interest rates

therefore appear to lie ahead. BNM also appears content with the pace of the

ringgit's appreciation and is unlikely to want to prevent excessive strength as

they see recent gains as being in line with economic fundamentals.

--OIL RALLY BOOSTING FISCAL POSITION

     Another positive factor for the currency is the ongoing recovery in energy

prices. As one of the few net energy exporters in the region, the economy stands

to benefit from an improvement in both terms of trade and government revenues.

One key supportive fundamental factor for the ringgit over the past three years

has been the relative fiscal prudence of the government amid declining oil

revenues. A solid starting position and rising oil prices should ensure that

election-related spending does not cause investors to fear a renewed widening of

the fiscal deficit.

     With the solid fundamental outlook, the currency's cheap valuation should

gradually mean revert, helping the ringgit strengthen. The unit remains far

below its 10-year moving average in real effective terms and is also cheap on

measures comparing average price levels to GDP per capita. With the bull market

remaining intact, outperformance against the dollar and other Asian FX looks set

to continue.

--ELECTION RISK

     One key risk is the upcoming general election that must be held before Aug

24. The elections are likely to be closely fought given the defection of former

Prime Minister Mahathir Mohammad to the opposition in 2016, with racial and

religious tensions likely to rise as elections approach, as is usually the case.

A win for the opposition, while not our core view, would pose risks to policy

continuity and Malaysia's relatively strong business environment.

--MNI Singapore Bureau; +65 8233 2326; email: Asia-Editor@marketnews.com

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

[TOPICS: M$A$$$,MC$$$$,MI$$$$,MT$$$$,MN$FX$]