Ringgit on the right path

PETALING JAYA: Foreign exchange strategists and economists are cautiously optimistic that the ringgit will gradually strengthen against the US dollar by year-end amid potential currency fluctuations in the global forex markets.

The factors which would support this scenario include the upsurge in oil prices, ringgit bond inflows, wider vaccination rollout and healthy foreign reserves.

As at press time on Friday, the ringgit was hovering at 4.19 to the US dollar from 4.18 a day earlier. In 2020, it averaged around 4.20 and ended the year at around 4.02.

Brent crude oil price on Friday rose 0.98% to US$74.85 (RM307) per barrel.

Maybank regional head, forex research and strategy, global markets, Saktiandi Supaat told StarBiz that firm Brent prices alongside recovering demand could bode well for the ringgit.

He said the positive trend in bond inflows in the first half of this year could help to mitigate the drags due to the equities outflows.

The recent FTSE Russell’s move to retain Malaysia’s membership in the FTSE World Government Bond Index (WGBI) is positive and could be beneficial for fund flows into ringgit bond assets over the longer term, he said.

Furthermore, foreign reserves were largely on an uptrend since 2020 and in the first half of this year, said Saktiandi adding that this could help to arrest any episodes of dampening in ringgit sentiments.

He noted that pick-up in vaccine rollout and a more transparent framework such as the National Recovery Plan for easing of lockdown measures could help mitigate drags in sentiments on the Covid-19 front. The key is for the framework to adjust dynamically to conditions on the ground, he said.

The current challenges which could impact the local currency revolve around the domestic pandemic situation, intermittent bouts of political uncertainty, as well as the risk of broad dollar strengthening globally on incremental Federal Reserve’s hawkish shifts in policy stance.

Bouts of softness in ringgit cannot be ruled out, he said especially if domestic risk factors weigh in. But, the base case remains for a gradual strengthening in the ringgit by year-end, amid potential currency fluctuations in the global forex markets, ’ he said.

For the remaining of this year, Saktiandi (pic below) expects the ringgit to average around 4.13 to the US dollar and end the year at around 4.10.

Maybank Saktiandi Supaat

Meanwhile, Standard Chartered Bank head of fixed income, currencies and commodities investment strategy, Manpreet Singh Gill expects the US dollar against the ringgit to remain largely stable and range bound, between key technical support and resistance levels of 4.0 and 4.2.

“A weaker US dollar (on a six to 12 month horizon) and well-supported commodity prices, including oil, should offer support for the ringgit.

“The pace of ongoing vaccinations is something to monitor closely as the experience from other countries has been one of improved economic and financial market support for equity and forex markets as vaccinations gather pace.

“Risks to our currency view include the possibility of renewed Covid-19 waves and what continues to be a tightening policy bias in China, ” he said.

Juwai IQI global chief economist Shan Saeed.

Juwai IQI global chief economist Shan Saeed expects the local currency to maintain its stability despite financial fragilities in the exogenous environment.

He added that it may lose its momentum due to stronger dollar movement in the short run.

“However, I am maintaining our stance for the ringgit to trade at 3.67 to 4.10 against the greenback in the current year. Ringgit is going to strengthen by year-end due to higher export numbers, higher oil prices and surge in trade figures, ” he noted.

On whether there would be more pressure on the ringgit in the second half of the year, Shan said it was premature to say at this juncture as it depends on the Fed’s forward guidance on interest rates hike and its bond purchase or quantitative easing.

‘However, I can foresee four types of risks coming to the global financial markets. They are systematic risk, sovereign debt risk, liquidity risk and fair valuation risk. These four types of risks will make a major impact on many emerging market economies in the next six to 12 months.

Socio-Economic Research Centre (SERC) executive director Lee Heng Guie expects the ringgit to trade sideways against the US dollar amid getting support from firming commodity and crude oil prices. Nevertheless, he observes a weak correlation between the ringgit and commodity prices.

“While the continued strong demand of our exports (and hence, trade surplus) helps the ringgit, capital flows are still a dominant driver of the ringgit.

“Persistent foreign selling of the Malaysian shares, the prolonged movement restrictions and a rapidly rising infection cases and its consequential impact on the economy as well as the heightened uncertainty about political situation will likely weigh on investors’ sentiments regarding the ringgit, ” he said.

Furthermore, Lee noted that Bank Negara’s lifting of the export conversion rule of export proceeds, netting off export proceeds in its permitted foreign currency obligations would ease upside to the ringgit.

He said the strong US economic recovery, firm labour market conditions and higher inflation outlook may fuel the sooner than expected tapering of bond purchases and eventually increases in the Fed funds rate.

This expectation along with financial volatility and higher rise in bond yields could reset investors’ firmer view about the US dollar index and hence, a softer ringgit, he said.

OCBC Bank economist Terence Wu

OCBC Bank economist Terence Wu said its current year-end forecast for the US dollar against the ringgit is at 4.186, which is higher than current levels.

More generally, the immediate range for the US dollar-ringgit would be 4.15 to 4.20. “We expect 4.20 to be a reasonably firm resistance for now. There is perhaps more room for the ringgit to underperform regional peers, with scope for the Singapore dollar against the ringgit to move higher towards the 3.10 to 3.12 range.

“Our core view is that the ringgit will likely see some depreciation pressures into the second half of the year. However, the scope and extent of the depreciation will be manageable and orderly, ” Wu said.

Meanwhile, Bank Islam Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid said there seems to be multiple speed bumps for ringgit to stage convincing appreciation.

For a start, he said the 10-yr US Treasury yields have been on the declining trend despite hawkish statements from the US Fed along with encouraging economic data namely the employment figures and the ISM index for manufacturing sector.

The enhanced movement control order implemented in key states such as Selangor and KL which constitute about 40% of the nation’s economic output could also drag the overall recovery momentum, he said.

The recent specter on domestic politics could also weigh investors sentiment negatively towards ringgit, he said, adding that he expects ringgit to trade on the weaker side against the US dollar in the immediate term.