Positive outlook for the ringgit


  • Forex
  • Tuesday, 23 Jun 2020

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PETALING JAYA: Expectations of recovery in global trade and commodity demand offer a positive outlook for the ringgit, which has gradually strengthened against the US dollar since late-March.

Being a commodity-linked currency, experts believed the ringgit would continue to ride on the improvement in crude oil prices that has sustained for nearly two months.

In addition, the release of pent-up demand as more economies reopen globally is also expected to boost exports from Malaysia and in turn, support the currency’s uptrend.

However, the ringgit’s performance remains susceptible to foreign exchange volatility as uncertainties revolving the Covid-19 pandemic continue to linger.

MIDF Research economist Mazlina Abdul Rahman told StarBiz that the gradual increase in oil prices would lend support for the ringgit at least until end-July 2020.

Oil prices have shown some strength for the past weeks, especially following the commitment by Opec and Russia in extending oil production cuts as well as the commitment by certain oil producers to meet previous production cut plans.

The ringgit hit its year-to-date weakest level of RM4.447 against the US dollar on March 23, but has since strengthened by almost 3.8% to RM4.2788 as of press time yesterday.

Year-to-date, the ringgit has depreciated by 4.6% against the US dollar.

“The resumption of businesses worldwide as restrictions being lifted in stages is also likely to increase demand for oil.

“Being a net exporter of petroleum, volatility in crude oil prices greatly affects the ringgit movement, ” she said.

Mazlina forecasts Brent crude oil price to average higher in the third quarter of 2020 at above US$40 per barrel, as compared with around US$33 per barrel in second quarter 2020 up till June 22.

She, however, cautioned that several factors such as further cut in the overnight policy rate (OPR) and political risks could weigh down the ringgit’s performance.

“Despite oil prices being the catalyst for the ringgit to strengthen, fear of a second wave of Covid-19 could hamper the growth of demand.

“Re-escalation of the US-China trade spat and China-India war could also deteriorate the sentiment, ” she said.

Mazlina expects the ringgit to hit RM4.25 per US dollar by end-2020 as compared to RM4.09 as at end-2019.

Meanwhile, Bank Islam chief economist Mohd Afzanizam Abdul Rashid said there is always a case for the ringgit to appreciate, going forward, especially from the carry trade perspective.

A carry trade is a trading strategy that involves borrowing at a low-interest rate and investing in an asset that provides a higher rate of return.

“It should be noted that our OPR is fairly high compared to the advanced economies benchmark interest rates and this offers a positive carry trade perspective, ” said Afzanizam.

With the OPR being higher than the benchmark interest rate in the United States, this could induce some capital inflows as investors seek higher returns. This, in turn, would result in stronger demand for the ringgit and help the currency to appreciate.

Afzanizam believes that the US dollar-ringgit exchange rate will continue to remain volatile, given the uncertainties over the state of the global economy following the Covid-19 pandemic.

“The intermittent rise in new Covid-19 infection rates continue to affect market sentiment as this will affect the reopening of the economy.

“Having said that, the government has been very accommodative to prescribe additional stimulus and this indicates the economy should be able to recover if the reopening of the economy continues to happen, ” he said.

Afzanizam added that the exchange rate could touch RM4.25 per US dollar by year-end, as compared to his earlier forecast of RM4.30.

Alliance Bank chief economist Manokaran Mottain also expects the US dollar-ringgit exchange rate to touch around RM4.20 in the short term.

“The crude oil prices are expected to strengthen further and could achieve pre-pandemic levels as more economies reopen and consumption rises. This would provide support to the ringgit further, ” he said.

Manokaran also pointed out that the ringgit could benefit from the weakening US dollar as the United States continues to see high Covid-19 cases.

“The uncertainties over the country’s upcoming election in November will also weigh on the US dollar’s performance, ” he said.

Last week, the ringgit eased against the US dollar by 0.09% on a week-on-week basis, despite the recovery in oil prices.

In a note issued yesterday, Kenanga Research said the weakness was mainly due to the favourable market sentiment around the greenback and a sharp spike in Malaysia’s unemployment rate.

Moving ahead, the research firm expects the positive tone surrounding the oil market to uplift the commodity-linked currency from last week’s loss.

“In addition, the news on a possible bilateral travel bubble between Malaysia and six other ‘green’ countries will help to provide further support for the local note, ” it said.

From a technical viewpoint, Kenanga Research said the exponential moving average suggested a downward bias for the ringgit this week.

The local note is expected to depreciate slightly by 0.13% to RM4.273 against the US dollar from its closing price of RM4.262 last Friday.

“Overall, the short-term technical outlook indicates the ringgit to trade within a range between RM4.260 and RM4.290, ” it said.

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