UOB Bank Malaysia sees ringgit rebounding to 4.1 vs US$

KUALA LUMPUR: Receding domestic political and economic headwinds have improved the outlook for the ringgit, which is set for a rebound this year, according to United Overseas Bank (M) Bhd (UOB).

The regional financial institution said the Malaysian currency would likely average at 4.25 per US dollar by mid-2016 before strengthening to 4.10 by the end of the year. The estimates were based on the revision in its US Federal Reserve rate outlook with fewer hikes this year and recent ringgit strength.

The ringgit gained 0.55% to close at 4.1975 against the US dollar yesterday.

“Ringgit was the worst-performing (Asian) currency against the greenback last year, but it has quickly turned around to be one of the strongest performing currencies in the region today,” UOB Malaysia economist Julia Goh said.

“We continue to hold the view that with domestic headwinds receding, especially on the political front and resolution of the 1Malaysia Development Bhd issues, we think this should pave the way for a stronger ringgit (this year) compared to last year,” she told reporters at a briefing on UOB’s Asean foreign exchange outlook here yesterday.

According to Goh, the market has responded relatively well to Malaysia’s new fiscal measures introduced as part of the country’s revised 2016 Budget, which was announced in January 2016. The Malaysian government’s move to improve the country’s fiscal position and a weaker US dollar, she noted, had contributed to the ringgit’s recent strength.

“In the coming months, we expect the ringgit to continue to be supported by the country’s diversified export base, sustained current account surplus and the Government’s ability to manage fiscal risks from weaker oil prices,” Goh said.

To watch, though, she noted, are external noises that could break the ringgit momentum, and a key event risk when Bank Negara governor Tan Sri Zeti Akhtar Aziz retires at end-April.

“The ringgit deserves a far stronger value than what it is traded at now, but because of the external factors, it is hard to see the ringgit strengthening to less than four against the greenback,” Goh said.

“There will still be a lot of volatility, as the ringgit’s path also depends on what happens in the United State and China and to oil prices,” she explained.

UOB recently lowered its outlook on US Fed’s move to two interest-rate hikes in 2016, instead of the earlier estimated four hikes.

The group said it did not expect a hard landing for China, which is in the process of transitioning from “quantity” to “quality” growth. While the bulk of the yuan’s adjustments is likely over, UOB Malaysia said it expected there would be more volatility and two-way movements of the China’s currency against the US dollar.

On oil prices, UOB’s base case was US$30 to US$35 per barrel in 2016, but it would not rule out the possibility of the commodity’s price sliding to US$20 to US$30 per barrel this year.

Meanwhile, on the Zeti factor, Goh said: “The market is still speculating on who is going to be the next governor, which indicates that the market has not fully priced in the factor yet. In that sense, there could be some volatility. But I have confidence that the outcome will be a favourable one.”

As for the outlook on Malaysia’s economy, Goh said she expected the country’s gross domestic product growth this year to slow to 4.2% from 5% last year.

“We expect growth to ease to 4% in the first half of 2016, but with the aid of the Government support measures that are supposed to kick in in the second quarter, we expect growth to improve in the second half of the year to 4.5%,” Goh said.

On the outlook for Malaysia’s interest rate, Goh said: “We don’t expect any adjustment to the overnight policy rate (OPR) this year.”

“But there could still be a 50-50 chance (of the OPR being reduced) in the middle of the year, depending on growth conditions, which are very much driven by external factors. But if the external conditions remained stable and no unexpected slowdown happened, then we think that Bank Negara would keep interest rates on hold,” she explained.

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