Ringgit to weaken slightly in second quarter after elections?

THE ringgit, which hit a level not seen since July 2016, is expected to trade on a stronger note but may retrace slightly to above 4.00 to the US dollar in the second quarter.

“Overall, the ringgit is expected to appreciate against the US dollar this year but we are looking at a short-term correction in the second quarter as the market behaves in the usual ‘buy on rumour, sell on fact’ manner.

“We expect profit-taking after the general election (in the wake of foreign inflows into equity and bond markets on a pre-election rally) and with an interest-rate hike out of the way,” says Suhaimi Ilias, group chief economist, Maybank Investment Bank.

Elections are expected in the February to April window, and the overnight policy rate may be raised possibly in May, says Suhaimi.

The ringgit closed at 3.9700/9730 against the greenback on Friday, from the close of 3.9850/9900 the day earlier.

“Macro US dollar weakness seems sustained at the beginning of 2018, and ringgit strength should sustain until the general election.

“But we may see a retracement of the ringgit against the US dollar in the second quarter,’’ according to Hor Kwok Wai, chief operating officer, global markets, Hong Leong Bank.

“The ringgit uptrend is likely to sustain, given the strength of commodity prices, relatively better fiscal position and a more hawkish tone on interest rates.

“But we have to keep an eye on inflation which will affect the interest rate policies of the US and Malaysia,’’ says Danny Wong, CEO, Areca Capital.

“After weakening by a cumulative 31.8% against the US dollar from 2013-2016, the ringgit strengthened by 10.8% for the first time in 2017.

“One should remain wary of the state of capital flows and exchange rate pressure triggered by the US Fed’s continued rate hikes and shrinking of balance sheet.

“The ringgit could face headwinds in the first half, with the impending general election,’’ says Lee Heng Guie, executive director,

Socio Economic Research Centre.

“The trend in capital flows holds the key in the performance of the ringgit this year. The local bond market recorded net inflows of RM9.3bil from July to November last year, from net outflows of RM20.9bil in the first half of last year.

“A failure to convince foreign investors that the government remains on a favourable policy path may result in unnecessary fear and lead to rapid capital outflows.

“While Malaysia can generally take advantage of the robustness of the external sector, (a successful) economic balancing act is critical in strengthening its fundamentals,” says Nor Zahidi Alias, chief economist, Malaysian Rating Corp.

Current imbalances include fiscal deficits, government indebtedness and a high household leverage position.

Several factors are likely to support the ringgit, says Zahidi.

Due to a synchronised recovery of the global economy, other currencies will generally appreciate against the greenback, which is not expected to strengthen significantly.

Diminished expectations of US fiscal stimulus and expected rise in US budget deficit are also likely to dampen the greenback.

Recovery of exports for Malaysia, increased consumer spending and investments point to sustained expansion in 2018.

Brent oil has hit US$70 per barrel for the first time in three years.

Will there be a correction?

“The climb back to US$80-US$90 levels will be a long, hard slog but investors are increasingly converted to this view, and they will

likely hold on to it almost like a religion,” says Pong Teng Siew, head of research, Inter-Pacific Securities.

“There is lack of evidence of any demand surge, and further upside of oil prices will likely attract new supply from shale oil,’’ says Thomas Yong, CEO, Fortress Capital.

The recent upward movement of oil prices is mainly due to an inventory drawdown as a result of supply disruption in the North Sea, according to the US Energy Information Administration.

“The unrest in Iran (and the collapse in oil production in Venezuela) also buoyed the rally and this may not be a lasting catalyst. A sharp correction of the stock markets will likely cause a sharp retracement of commodity prices while there is also risk of non-compliance on production cuts,’’ says Lee.

Members of the Organisation of the Petroleum Exporting Countries are not keen on Brent prices above US$60 a barrel because of the potential for more shale output, said Bloomberg, quoting Iran’s Oil Minister Bijan Namdar Zanganeh over the ministry’s news service, Shana.

“But oil demand and supply dynamics still look positive, while shale producers would likely not repeat their mistake of expanding too fast to prevent another build-up in debt,” says Zahidi.

Columnist Yap Leng Kuen views that too high a price for oil will lead to increased prices all round.