In other words, short-term currency movements may have nothing to do with economic fundamentals. For example, the euro is among the strongest currencies in the last three months. Yet, the eurozone economy is stagnant, with weak global demand for its exports, and facing high energy costs.
Last week, we showed that external factors were the reasons for the surge in the ringgit in the last year, and especially during the recent three months. With Bank Negara Malaysia (Bank Negara) unlikely to cut its policy rates in the near term, while the US Federal Reserve was widely anticipated to follow through with further reductions, it can cause an outflow of USD, since currencies respond to changes in future yields. This is further reinforced by a risk-on financial market sentiment, where global investors gravitate towards riskier, more cyclical emerging market currencies. And the ringgit benefited greatly because it has high trading liquidity among the emerging market currencies.
The data supports the above proposition. In all the quarterly periods where the ringgit was strong, they were matched by high portfolio inflows. And vice versa. On the other hand, the trade data on current account was inconsistent with the ringgit’s movements. Plus, exporters were not converting their foreign currency earnings, evidenced by the constantly rising foreign currency deposits in the local banking system. As highlighted last week, drivers of currency movements for the short term are quite different from the drivers of the medium and longer term. The short-term drivers are mostly capital flows, news and expectations. Trade balances and monetary stance do not fluctuate wildly and are mostly predictable — and what is known is already in the price.
