PETALING JAYA: The interest rate differential in favour of the US dollar and safe haven status will continue to keep the currency strong until inflation expectations and interest rates projections top off and policymakers start to roll back measures.
The ringgit closed lower at RM4.609 against the dollar yesterday after the runaway greenback closed at 114 on the dollar index on Monday. More gains could be on the cards, said analysts.
“We expect the dollar to maintain its strengthening momentum in the near term despite concerns of a sharp slowdown or mild recession brewing driven by Federal Reserve’s (Fed) continuous tightening momentum,” said AmBank Research Group chief economist and head of research Anthony Dass.
He added with the ringgit now having crossed 4.60 levels, it is now expected to weaken to 4.65 in the near term.
Currency traders said the strong dollar is helping the Fed control inflation in the American economy with cheaper imports. Hence, it’s in no hurry to see a weaker dollar.
Lee Heng Guie of the Socio-Economic Research Centre (SERC) said investors and businesses need to get accustomed to the weaker ringgit as the Fed is on course to push rates higher and hold for longer till inflation in the US economy is brought to target levels.
“We need to tolerate a weaker ringgit and make adjustments and temporarily bear with it.
“Bank Negara has the experience to deal with volatility in the currency market and ensure availability of liquidity, supply of dollars for transactions and manage cost of borrowing to keep the economy on a sustainable growth path,” Lee said.
The local unit has depreciated by about 12% against the greenback since January 2021.
In comparison, it fell by about 27% against the dollar over a 36-month period in 2014-2016 when crude oil prices crashed and from the Fed tapering action.
The ringgit also fell by some 28% against the dollar during a 10-month period following the Global Financial Crisis and 43.7% (from April 1998 to January 1999) during the Asian Financial Crisis in 1997 and 1998.
The weak ringgit in the meantime would benefit export-oriented industries such as palm oil producers and, electrical and electronics manufacturers while costing domestic market oriented industries with high import content.
Despite Malaysia’s annual food imports at about RM60bil and core inflation in August rising to 4.7% driven by higher food prices, SERC estimates inflationary pressures from the weaker exchange rate on consumers could be limited as final consumption goods account for about 9% of the overall consumer price index basket.
Cost pressures will likely be felt via imports of intermediate goods which account for some 55% of the country’s imports. US dollar debt, meanwhile, is minimal at 5% of total external debt.
In the meantime, markets will look to Fed chairman Jerome Powell’s comments this week to see if there is any change in his hawkish tone on policy direction.
Some are betting the Fed chairman may have some room to tone down his hawkish rhetoric as the American economy has been posting two quarters of negative gross domestic product (GDP) growth while every 1% hike in Fed fund rate will add US$285bil (RM1.3 trillion) a year to the US deficit.
He is also constrained by the fact that the US debt to GDP ratio is now at 122% as compared to 30% in 1980 when the country faced a significant inflationary period.
Current projections imply another 125 basis point tightening over November and December which would take the Fed fund rate to the 4.25% and 4.5%.
The rate projections have taken most major market indices into bear territory while awaiting earnings reports. With most negativity priced in and funds holding cash, investors are looking for a signal to mobilise their money.
The strong dollar has made everything cheap in Asia.
Investment flows are edging towards countries benefiting from stronger exports as a result of weaker local currencies and into markets that are domestically driven such as India and South-East Asia as recent net year-to-date inflows into Bursa Malaysia stocks show. The ringgit could get a little boost from the yuan whose fundamentals depend on Beijing’s stand on its zero-Covid-19 policy which could be changed at the 20th National Congress of the Chinese Communist Party next month.
The consensus is for Bank Negara to raise its overnight policy rate (OPR) by another 25 basis points in November and the possibility of a general election this year could help improve market sentiment more so if it results in a strong government in Putrajaya.
“Favourable domestic economic prospects amid strong tourism activity, yuan’s potential strengthening post-Chinese Communist Party congress on Oct 16, US dollar seasonal weakness, and elevated commodity prices may help the ringgit to recoup some losses. Our greenback and ringgit end-2022 forecast has been revised upwards to RM4.44 from RM4.35,” Kenanga Research noted in a report Monday.
Another event that could boost investors’ sentiment is the midterm elections in the United States on Nov 8 that could see investors going long on stocks ahead of the date, based on historical data.
A gridlock outcome from the midterm elections will ensure no major taxes or spending and policy surprises from Washington which would be bullish for investors and drive the US markets off present lows and despite the Fed’s ongoing battle with inflation.