PETALING JAYA, 27 June: Brexit is likely to trigger another round of volatility in the ringgit, which has largely stabilised this year, and a fresh round of capital outflows in the near term, as global financial markets deal with the far- reaching ramifications brought on by the exit of Britain from the European Union (EU).
Malaysian Rating Corp Bhd chief economist Nor Zahidi Alias said while the impact on trade is expected to be minimal, with the UK accounting for only 1% of Malaysia’s total trade, the ringgit is expected suffer from heightened risk aversion.
“With Brexit, global and economic uncertainties are expected to persist over the next two years or so. However, we do not foresee the ringgit falling to its historical lows against the US dollar, barring another global financial crisis. The concern should be more about the global economic and financial uncertainties overall, not just about the ringgit,” he told SunBiz.
The ringgit closed at RM4.09 against the US dollar on Friday following the Brexit vote and RM5.69 against the British pound, compared with RM4.02 against the US dollar and RM5.94 against the pound a day earlier. The pound sterling had plunged to a 30-year low of £1.32 against the dollar during trading on Friday following the shock “leave” outcome of the referendum.
Zahidi said capital flows will be affected as investors increasingly seek safe haven assets, leading to a further strengthening of the greenback and the yen in the near term.
“Brexit will also cause a knee-jerk reaction in the financial markets – currencies being the most vulnerable. The volatility in equities and bonds cannot be underestimated in the short term but will eventually subside when a clearer picture (from the impact of Brexit) emerges.”
HSBC head of global emerging markets, foreign exchange research, Paul Mackel believes the overall implications of the vote to leave are negative for emerging markets’ foreign exchange.
“The likely stress in global markets will see most emerging markets currencies come under significant pressure for the time being. Currencies with large foreign portfolio exposures and wide external imbalances will face large downside pressure. These currencies (which include the ringgit) are the most ‘risk-off’ currencies,” he said.
Bursa Malaysia’s FBM KLCI lost 5.93 points or 0.36% to close at 1,634.05 points on Friday after the Brexit vote despite overnight gains on Wall Street. The Malaysian stock market’s key index traded within a range of 28.19 points, between a high of 1,640.07 and a low of 1,611.88. The FBM KLCI’s performance was in step with that of its Asian peers in the wake of the UK’s vote to leave the EU.
Trading volume jumped to 2.22 billion shares worth RM2.36 billion compared with 1.11 billion shares worth RM1.44 billion on Thursday. Market breadth was negative with 760 losers and only 179 gainers.
TA Securities head of research Kaladher Govindan sees the market correcting further, saying the FBM KLCI may see a retesting of the key 1,500-point support level by August or September.
“It (Brexit) has raised uncertainty in the market and people will react to the negative news and the worry is the negative sentiment on the EU spreading to other member countries. As the EU makes up 16.9% of the global gross domestic product, that could impact the market because of what is going to develop over the next few moths (other countries considering exiting the EU). Investors should remain defensive and wait to buy at lower levels,” he told SunBiz.
However, he added, the Brexit uncertainty should be short term, provided it does not cause a domino effect in the other 27 EU member countries (although it is most likely to happen).
— THE SUN