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Investors should buy the ringgit against the Singapore dollar because higher commodity prices will spur Malaysia’s economic recovery over the next six months, according to Australia & New Zealand Banking Group Ltd.

The ringgit may advance 2 per cent to 2.40 per Singapore dollar by the end of the first quarter of 2010 as increases in the prices of crude oil, palm oil and rubber will help Malaysia’s economy expand at a faster pace than its southern neighbour, strategist Yeo Han Sia said in a research note today.

“We expect the base effect in commodity prices to narrow the export gap in Malaysia’s favour, having knock-on effects for portfolio flows and the currency cross rate,” wrote Yeo, who is based in Singapore.

The ringgit was 0.2 per cent higher at 2.449 per Singapore dollar as of 2:57 pm local time, according to data compiled by Bloomberg. It reached an 11-year low of 2.471 this month and Yeo predicts the exchange rate will return to a trading range of 2.20 to 2.40 by the end of March.

Exports of raw materials accounted for about two-thirds of Malaysia’s current-account surplus and almost half of the increase in its current-account-to-GDP ratio between 2001 and 2008, ANZ said in the report, citing International Monetary Fund statistics. Electronics and chemical products dominate Singapore’s non-oil exports, the bank said.

Palm oil recently fetched RM2,136 per ton, compared with an average of RM1,609 in the fourth quarter of 2008. Crude oil for November delivery traded at US$66.47 a barrel, versus US$59.72 in the final three months of 2008, according to data compiled by Bloomberg. They accounted for 11.4 per cent of Malaysia’s exports in the first seven months of this year, according to the trade ministry.

Commodity Prices

In the absence of a meaningful pickup in demand, prices for Malaysia’s key commodity exports will show a 50 per cent to 100 pe rcent increase on a year-on-year basis in the coming quarter, Yeo said.

ANZ recommended selling the Singapore dollar against the ringgit using non-deliverable forwards to profit from the projected move in the exchange rate. The ringgit has the potential to climb to 2.37 per Singapore dollar, while the trade should be abandoned if the currency drops to 2.47, it advised.

Yeo said the ringgit’s 2.5 per cent slide against the Singapore dollar this year is due to market forces rather than any deliberate attempts by the Malaysian authorities to weaken its currency. Changes in the nation’s foreign-exchange reserves and forward positions suggest Bank Negara Malaysia has been buying the ringgit over the past four quarters, the strategist said. — Bloomberg

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