Ringgit to perform in 2021 despite short-term headwinds

AmBank Research expected the ringgit to hover around the 3.98–4.04 levels against the greenback on average, although it may give up some of its gains during the year.

PETALING JAYA: The ringgit is expected to remain on a positive trend this year on the back of a weakening United States dollar, despite near-term challenges for the Malaysian currency.

AmBank Research said the still-largely undervalued ringgit in real effective exchange rate (REER) terms will remain as an attractive valuation as it will provide support to the currency over the long term.

It expected the ringgit to hover around the 3.98–4.04 levels against the greenback on average, although it may give up some of its gains during the year.

The research house said the ringgit could also weaken to around the 4.10–4.15 levels.

The greenback has appreciated 0.3% year-to-date, resulting in currencies like the ringgit to weaken against the dollar by 0.6% to 4.045

“With the US election and promising vaccine news behind us, attention would return to macro fundamentals and the still rising Covid-19 infection rates worldwide.

“This uncertainty could last between two and four months. Containment measures being reintroduced at a heavy economic cost could raise unemployment and dampen activity. “Nonetheless, the US dollar secular downtrend is expected to persist, driven by vaccines that will reinvigorate the reflation trade, ” the research house said in a report.

AmBank said among factors that will determine the value of the currency going forward were political stability, the risk of downgrades by foreign rating agencies and the review of Malaysia's position in the World Bond Index.

“The resurgence of another wave of infections around the world including Malaysia and the imposition of lockdown measures would weigh on the ringgit’s strength.

“Additionally, the relatively tighter monetary policy that is supporting the ringgit would lose some steam as Bank Negara would likely to reduce the overnight policy rate (OPR) by 25 basis points (bps) from the current 1.75% in the next monetary policy committee (MPC) meeting in March in a move to support the economy, ” it said in a report.

The research house added that the ringgit’s gains will likely be capped by inflation differentials as Malaysia’s inflation is likely to be higher than the US this year.

Malaysia’s consumer price index (CPI) is projected to be 1.9% to 2.1% this year and 2.1% to 2.3% next year.

The US on the other hand, is expected to be around 1.5% to 1.7% and 1.9% to 2.0% respectively.

AmBank said this would reverse the advantage that Malaysia had in 2020, where the inflation was -1.1% year-on-year (y-o-y) against 1.5% (y-o-y) for the US.

It added the need to maintain export competitiveness will likely put some depreciatory pressure on the ringgit, especially in the later part of 2021 as inflation will make Malaysian goods more expensive, with all other things being equal.

On drivers for the ringgit, one of the points made by AmBank was the widening of bonds' yield spread due to the Malaysia and US monetary divergence.

“The difference between the two countries' 10-year government bond yield now stands at around 167 bps, almost the widest on record.

“The yield spread between the two may further widen in 2021 and if so, it will continue to encourage more capital inflows into Malaysia and further support the ringgit, ” it said.

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