KUALA LUMPUR: The ringgit is expected to benefit from firmer Asian currencies benefitting from the interest rate as well as growth differentials between the region with industrial economies, AmBank Research said.
In its forex report issued on Monday, it said the upside risk to the ringgit would be more so should the US recovery heads into trouble from rising virus cases and renewed local lockdowns and the Fed embarks on more quantitative easing (QEs) to stimulate the economy.
“This would result in asset reallocation in which this region is likely to benefit, especially with China expected to be the first major economy to emerge from a severe economic contraction.
“Thus, the region’s currencies are expected to appreciate by 0.5% in the next three months and continue to climb around 1% in 12 months’ time, in spot terms. The ringgit would also benefit from the appreciation, ” it said.
AmBank Research, however cautioned that downside risks for the ringgit can be influenced by:
(1) the risk of the second wave of the virus impacting the world just like the second Spanish flu wave and resulting in lockdowns and MCOs;
(2) noises from political risk, both domestic and elsewhere;
(3) trade wars blowing up again leading to retaliatory CNY weakness;
(4) geopolitical tension;
(5) vulnerable commodity price movements i.e. crude oil;
(6) global economy and/or domestic economy failing to reflate post-Covid;
and (7) downgrade risk by FTSE Russell and rating agencies.
It also pointed out Bank Negara Malaysia has taken a more positive role this time around. The central bank has reduced the overnight policy rate (OPR) by a total of 125 basis points during the year to now at 1.75%.
And the current 2% statutory reserve requirement (SRR), the central bank has allowed all banks and principal dealers to use MGS and MGII papers to fully meet their SRR compliance until May 31,2021.
AmBank Research said such policy measure will allow banks and principal dealers to “substitute” their MGS and MGII holdings for liquidity locked under the SRR.
Evidence of a highly supportive central bank was also reflected in some of the measures taken to support businesses and households during the movement control order (MCO).
Fiscal spending was raised to RM295bil with RM45bil in the form of direct injection to support the economy impacted by the pandemic virus.
AmBank Research said with the relaxation of the MCO plus the monetary stimulus and fiscal support, there is growing evidence of a gradual pick-up in some of the business activities.
The Purchasing Managers Index has steadily climbed above the expansionary/contraction threshold in June.
The easing of the MCO resulted in stronger trade in June. Exports to key destinations like the US, China and Japan had a strong run in June.
AmBank Research said that overall, the economy may have hit the “trough” in 2Q2020 and should modestly improve in 2H2020 supported by the recovery measures.
As for the US dollar, it said even before Covid-19 turned into a pandemic, the US dollar was already losing momentum.
The economic growth in 2018 and 2019 was supported by the Federal Reserve’s rate cuts and the use of its balance sheet.
And with the global policy rates now effectively low, rate differentials do matter for the USD cycles.
The 10Yrate differential between the US and DXY components suggests more weakness to the USD.
With some easing from the March Covid-19 panic, the global monetary easing will provide some positive impetus to economic activities.
Assuming that the second wave of the virus is well contained, there is ample room for a “mini reflationary” macro environment driven by the loose global monetary conditions that have been in place since 2016 and a continued scope for further trade reflation.
“Nevertheless, the downside risk to the currency remains. This could happen if the US economic momentum continues to lag against the rest of the world (RoW) throughout the recovery period from the virus pandemic.
“Besides, the limited tolerance by the Fed for USD funding shortages suggests that USD liquidity will remain ample. And finally, even should a V-shaped recovery does emerge, it is unlikely for the Fed to start tightening its policy aggressively relative to other major central banks, ” it said.
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