KUALA LUMPUR (Jan 27): Standard Chartered Global Research is raising its short-term forex rating on the ringgit to Neutral from Underweight.

It said on Friday the recent recovery in the global industrial production cycle was a short-term positive for the ringgit.

It explained that the US ISM manufacturing index rose to 53.9 in December 2011 from 52.7 in November. This was the highest level since June 2011.

“We note the seasonality of the ringgit. Since 1Q of 2006, it has appreciated an average 1.66% versus the US dollar in 1Q and 0.58% in 2Q, weakened 0.48% in 3Q, and appreciated 1.48% in 4Q. As such, 1Q tends to be the best quarter for the ringgit,” it said.

StanChart research said it had been concerned about foreign positioning in the Malaysian government bond market, where foreigners hold about 34.8% of MGS and 70% of central bank bills.

However, foreign bond investors were relatively resilient in the later part of 2011, when the euro-area debt crisis escalated and global recession fears increased.

“From July to November 2011, foreign ownership of Malaysia’s local-currency bonds fell only marginally to RM169.1 billion from RM186.5 billion. In addition, there is a limited correlation between foreign bond inflows and US dollar and the ringgit,” it said.

The research house said the US Fed’s intention to keep interest rates on hold until “at least late 2014” is a positive for the ringgit, as it is supportive of capital inflows,” it said.

StanChart research said it maintained its medium-term Overweight forex rating on the ringgit as from a real effective exchange rate (REER) perspective, the ringgit appears modestly undervalued, especially given the fact that Malaysia still runs sizeable current account surpluses.

On a relative basis, Malaysia’s currency appears cheap against that of its largest trading partner, Singapore.

The Singapore dollar-ringgit is trading at 2.43, compared to an average of 2.35 since July 2005, when the ringgit was de-pegged from the US dollar.

“Attractive valuations and sizeable current account surpluses should support the ringgit over the medium term,” it said.

StanChart research also said Malaysia was a substantial exporter of palm oil, rubber and LNG, which together account for around 21% of its exports.

“We are generally bullish on commodity prices, particularly palm oil, which we expect to rise gradually throughout the year, reaching RM3,600 a tonne at end-2012.

“High commodity prices are likely to support the economy, particularly in 2H. We expect GDP growth to pick up to 2.5% on-year in 3Q and 4.3% on-year in 4Q from 1.6% in 2Q. Improving growth should support capital inflows to Malaysia in H2, and hence the ringgit,” it said.

Real money funds

Stanchart research pointed out that asset managers who manage their currency actively and separately from their underlying assets typically adopt a more qualitative, or fundamental, approach.

“We recommend that such assets move to neutral from underweight on the ringgit, as the recent recovery in the global industrial cycle will support the ringgit over the next one to two months.

“However, we believe it is too early to raise the MYR to overweight, as we expect Malaysia’s economy to show sharply in 1H,” it said.

As for currency overlay managers, by contrast, typically take a more quantitative, or technical, approach to currency risk managements.

The 55-day moving average (MA) has just rolled whereas the 100-day and 200-day MAs are still pointing higher. This suggest that currency overlay managers have turned neutral on the ringgit and may turn overweight if the 100-day and 200-day MAs follow through.

Corporates - Transaction risk

The research house said its US dollar-ringgit forecasts are above forwards on a three- to six-month basis.

Hence, Malaysian exporters should maintain neutral hedge ratios on short-term US dollar receivables.

However, it said that its US dollar-ringgit forecasts are substantially below forecasts on a nine- to 12-month horizon.

“Hence, Malaysian exporters should raise long-term hedge ratios over the coming three to six months. This is particularly true if USD-MYR bounces towards 3.22, the top from Oct 4, 2011,” it said.

Stanchart research said Malaysian exporters with euro receivables should maintain high hedge ratios both short- and medium-term, as the ringgit is likely to continue to outperform the euro.

Finally, Malaysian exporters with Chinese yuan receivables should maintain neutral hedge ratios for now, but look to raise them over the coming three to six months, as the ringgit should outperform the yuan in 2H.

Translation risk

Malaysian corporates with US and European balance-sheet risk should look to raise long-term translation risk hedge ratios over the coming three to six months.

It said the ringgit should outperform both the US dollar and the euro over the medium to long term.

“Conversely, we recommend that Malaysian corporates with US or European exposure look to raise their hedge ratios immediately,” it said.