KUALA LUMPUR: The persistent weakness in the US dollar is surprising and could continue to persist in the short term, said Standard Chartered Bank’s global chief economist David Mann.
“The US dollar’s recent weakness has caused many people’s year-end targets to be hit within the first month of the year. We only upgraded a 0.2% gross domestic product (GDP) forecast to our 2018 forecast for the US.
“Many people have been positioning for a short dollar around the world,” Mann said at the Global Research Briefing 2018 press conference yesterday.
“This can persist for a little bit longer certainly, especially if we still see as much volatility: higher in the euro and lower in the dollar-yen and this can still pressure the dollar to Asia currencies across the board to even lower levels. There is a growing risk that we have already hit our targets and it may even go lower than that by year-end,” he added.
Commenting on this matter, its global research macro strategist Mayank Mishra said his target for the US dollar- Malaysian ringgit currency pair is 3.90 at the end of 2018.
“As we know, it has already reached there.
“The pace of the dollar weakness has actually surprised us, even other analysts as well. We think the dollar-ringgit forecast is skewed towards the downside,” Mishra said.
He added that there are several positive factors and amid a weak dollar environment, which has placed the ringgit as one of the best currencies to own today.
“The ringgit is one of our top picks for the Asian foreign exchange (forex) and forex universe. This is because of the valuation: the ringgit is trading at an 8%-10% discount on the 10-year real effective exchange rate average: and this often holds good value,” he said.
“On the flows side, we have seen a turnaround in investor flows recently and they are owning more Malaysian assets from a low base: and this is supportive of the ringgit.
“Lastly, we are seeing an improvement in forex broader risk sentiment,” he added.
Mishra also said that the higher crude oil prices could further boost sentiment on the ringgit, moving forward.
“We see a further rise in the ringgit given cheap valuations, increasing investor positioning with improving sentiment. And we remain bearish on the US dollar. We expect a further flattening of the yield curve,” he added.
Commenting on the interest rate hike by Bank Negara, Mishra said the house view is that it expects the central bank to hike it only once.
“We do not expect it to continue hiking. I would say the risk for emerging markets broadly are some of the external risks with the developed market’s (DM) central banks that are withdrawing liquidity. Now, we expect for this to continue at a gradual pace,” he said.
“None of the DM central banks are tightening very aggressively. But one risk is that if inflation picks up sharply later in the year and this causes DM central banks to tighten liquidity much faster than anticipated, it can lead to volatility or a selloff which will push emerging markets’ forex volatility higher and this may hurt sentiment. But this is not our base case here,” he added.
Meanwhile, on GDP growth, Standard Chartered Bank’s global research regional head of research for South-East Asia Edward Lee said he expects Malaysia to record a “very healthy” growth this year.
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