Mr prime minister, since you are going to Washington, could you do us a favour? Could you please ask President Trump about where the US dollar (US$) is moving. This would also in many ways help you in the coming Budget 2018 presentation.
A Reuters columnist recently said that the dollar has been notably weak, The trade-weighted U.S. Dollar Index (DXY) has fallen 8 percent since Inauguration Day. The 52 Week Range is around 91.62 – 103.82. On 4th September it was about 92.5.
Is the US$ under threat? All this while the assumption is about the safe-haven status of Treasury debt and the US$. The Treasury Department seems to be running perilously close to the cap on borrowing. Will there be a government shut down and the United States will go into default by sometime in mid-October? Over the last forty years there have been 18 gaps in budget funding with the latest shutdown in 2013. The quantitative easing medicine is not available anymore.
On the other hand, MSCI (a leading provider of investment decision support tools worldwide) said year to date, US investors with a global portfolio are enjoying a solid year. In US dollars, the MSCI World Index is up 12% up to August 17. For the euro terms though, the same MSCI World Index is up just 0.6%. However in local currency terms i.e. stripping out fluctuations, it is up 8.8%. The difference is currency movement i.e. the euro has strengthened.
Since August, there were calls for a strengthening ringgit. Standard Chartered gave an overweight call, saying its fair value at RM4.10 from a valuation standpoint. There is room for appreciation since it has been undervalued since 2014. Another reason for the optimism is the strong economic growth and reduced volatility of the currency. Measures taken by Bank Negara did its job too.
Winners would be export-oriented sectors because their sales are in US$. It would be an injustice not to mention that the stronger-than-expected half-year growth is also driven by entrenched global recovery and strong exports.
Whilst it was reported that there was notable expansion in private consumption we should take heed of the statement from Mydin managing director, Datuk Ameer Ali Mydin. He said, “Yes, times are hard and things are slowing down. But it’s an opportunity”. Fact is, malls and shopping complexes are either closing down or struggling.
Further, exchange rate appreciations are found to only partially reduce import costs, whereas the pass-through is even lower from import costs to consumer prices. Producers do not entirely pass on these cost savings to consumers. Empirical evidence suggests that there is only a relatively small reduction in import costs as the ringgit appreciates. But exchange rate depreciations seems to have a significant and stronger effect on inflation.
By the way, the Tourism Ministry may not be too happy with this call to strengthen the ringgit.
Mr prime minister, you may also want to ask President Trump on the economic forecast of the US. I heard inflation is nearing its target, unemployment sliding down further and monetary policy stimulus has begun to be withdrawn gradually. But Federal Reserve Chairperson admits a lot of workers are part-time. Also, most job growth is in low-paying retail and food service industries. It means structural unemployment has increased.
Though growth rate is expected between the 2 to 3 percent, President Trump promised to increase it to 4 percent. That would be faster but would it be achievable and healthy? Has the Trump rally gone too fast and too furious?
With growth, interest rate hikes are projected to contain inflation. The Federal Open Market Committee raised the fed funds rate to 1.25 percent in June 2017. Expections are to raise this rate to 1.5 percent by the end of 2017 and to 2 and 3 percent in 2018 and 2019 respectively. The low interest rates cannot be sustained if central banks begin to normalise their balance sheets. When the Fed begins to go back to “normal” interest rate levels it will inevitably hit the financial markets.
Usually, interest rate hikes in the US will be followed by weaker ringgit unless exports keep growing quickly.
The International Monetary Fund outlook was a pickup in global growth with global output projected to grow by 3.5 percent in 2017 and 3.6 percent in 2018. While risks around the global growth forecast appear broadly balanced in the near term, they remain skewed to the downside over the medium term. On the downside, rich market valuations and very low volatility in an environment of high policy uncertainty raise the likelihood of a market correction, which could dampen growth and confidence.
Another question is the proposed border wall. If Trump wants to proceed, please whisper to him on the availabilty of Malaysian companies to put a few bricks on the wall. Better still, please advise him on “Sehati Sejiwa and Unity” and also teamwork and mutual trust with Mexico.
I have a few more points but I think your office would already have a long list and I sincerely hope you could ask President Trump the above questions for us in Malaysia to plan our lives for the coming years bearing in mind what Datuk Ameer Ali Mydin said.
Meantime, the about 8,000 Malaysian students attending college or university in the United States are also waiting for the outcome.
What say you…