KUALA LUMPUR: The ringgit and other Asian currencies are expected to continue to be volatile against the US dollar, with downside risks, despite a projection the region’s economies will outperform those of the developed markets, HSBC Ltd foreign exchange (FX) strategist, global research, Daniel Hui said.

“Generally, we do think the ringgit will weaken against the dollar and against the rest of the region. We are relatively bearish on Asian currencies in the medium-term, despite expecting that growth will outperform,” he said.

The bearish outlook on Asian currencies was due to their dependence on developed market conditions, further expected negative foreign exchange data and regional central banks’ forex policy, which was expected to support the US dollar, as they bid for dollars to rebuild reserves.

Hui, who is based in Hong Kong, was speaking to The Edge Financial Daily after giving an FX customer briefing here last week, in conjunction with the launch of the 12th edition of HSBC’s publication entitled HSBC’s Guide to Cash, Supply Chain and Treasury Management in Asia Pacific 2009.

Hui said the ringgit was expected to weaken against the rest of the region, as well as versus the US dollar, and could touch RM2.50 to the Singapore dollar and RM3.90 against the US dollar by year-end.

“We’re relatively positive on domestic growth, but on the exports side, Malaysia looks unusually exposed to the global recession and the downturn in the US and developed market consumption. Malaysia also has the highest export-to-gross domestic product ratio in the region, excluding Singapore and Hong Kong,” he said.

There was also evidence of some level of reallocation of savings away from the ringgit into FX deposits.

“One thing we track quite closely is the percentage in the banking system that are FX deposits. This has risen quite notably in the past year, and continues to,” he said.

However, despite its weakness against other currencies, he said the ringgit had remained “quite well-behaved”, tracking the region’s currencies well, although this was likely due to an explicit FX policy choice by Bank Negara Malaysia (BNM).

He said looking at intervention numbers, BNM had ranked as one of the most active in intervention, having sold more US dollars as a percentage of its total reserves than any other central bank in the region since September.

“I think this was quite a prudent policy choice. It is a positive move for BNM to use its large war chest of reserves to maintain stability in the FX market, when all other markets saw unprecedented volatility.

I’m not worried about the level of reserves, it still has far more reserves than most people think is an appropriate minimum level,” he said. As at April 30, BNM’s international reserves amounted to RM320.4 billion, equivalent to US$87.7 billion.

Hui added that given the level of US dollars sold by BNM, the central bank would likely start to consider reaccumulating FX reserves, and in doing so allow the ringgit to weaken against its peers.

Meanwhile, he said the exchange rates of Asian currencies against the US dollar would probably remain highly volatile.

“It tends to be driven by risk appetite, so when risk appetite is high, the US dollar will tend to weaken against Asian currencies, and vice versa.
 
Ultimately, we see the dollar broadly higher against Asia.”

He said while Asian economic growth could rebound sharply, the developed markets would not recover similarly, and as such, foreign investors, including multi-national corporations, would be more careful in how and where they invested, adding this would also be due to tight credit conditions in the US.

He said other constraints to Asian currency appreciation was late-cycle adjustments that had not hit the region yet, such as falling remittances, which were linked to higher unemployment, and sharply lower foreign direct investment inflows, which would likely come through by year-end.