AmBank says in its 2H24 macroeconomic report that it is unlikely for the US dollar-ringgit pair to retrace back above the 4.60 level as fundamentals and narrowing rate differentials will drive a firmer ringgit. — Photo: AZHAR MAHFOF/The Star (25/6/2020)
THE market is awaiting further clues to determine the future direction of the ringgit, with the focus now on the US Federal Reserve (Fed) and its upcoming policy meeting in September. There is widespread anticipation of a cut in the benchmark federal funds rate.
The local currency, which reached an 18-month high against the dollar on Thursday, is expected to strengthen further as the Fed begins to cut rates. The current target federal funds rate is 5.25% to 5.50%.
The question is whether the cut is 25 bps or 50 bps, with CME Group’s FedWatch leaning towards a 25-bps cut for September as of Aug 22, even after preliminary data showed US job growth was far lower than reported. The market is tied for a 25-bps and 50-bps cut in the November meeting while the odds are higher for a 50-bps cut versus a 25-bps cut in December.
After strengthening against the US dollar, the ringgit may have hit a resistance for now, and should weaken over the short term as the currency is overbought. Further positive catalysts could take the US dollar-ringgit pair to 4.22.
There is reason to believe that a 25-bps cut in September has been priced in, while a 50-bps cut would be a surprise that would support further strengthening against the US dollar. To put things in perspective, the US dollar-ringgit exchange rate closed at 4.79 in late February and again in mid-April.
CIMB Bank Bhd’s head of treasury and markets research Michelle Chia is projecting the currency pair to reach 4.30 by the end of the year, driven by the start of US policy rate cuts and falling US bond yields, net inflows from non-resident portfolio investors, improving trade outlook, healthier two-way forex flows by resident portfolio investors, as well as exporters and households’ diminishing preference for US dollar and foreign currency. There is also a possibility of the ringgit strengthening beyond 4.30 on more aggressive unwinding of accumulated long US dollar positions, including of onshore foreign currency deposits.
With the annual Jackson Hole symposium still ongoing as Star Biz7 goes to print, there is no way to capture the latest news flow, which have impacted the markets in years past.
“Jackson Hole offers a prime setting for (Fed chairman) Jerome Powell to lay the groundwork for the widely anticipated monetary policy shift, which is warranted (and perhaps even late) judging by the moderation in the US inflation outlook and employment conditions,” Chia says, projecting a 25-bps cut in September as the hard data continue to point to a “soft landing” rather than a recession. The August jobs report, the last before the September Fed meeting, would be the deciding factor.
“Inflection points are tricky to navigate. That has not stopped markets from pricing in US rate cuts in advance, about 220bps through end-2025, so forward guidance or data outturns that run against that narrative may prompt near-term technical retracements for the greenback.
“That said, we agree that US policy rates are likely to fall substantially and near-term volatility should not detract from the fundamental- and flow-driven trend of forex appreciation against the US dollar though the next year,” she adds.
There is also a strong case for a potential upgrade of the country’s sovereign rating next year, which could lead to an even more positive outlook for the ringgit. According to the Malaysian Institute of Economic Research (MIER) in its July economic review, Fitch may upgrade Malaysia’s sovereign rating to A- from BBB+, and Standard & Poor’s might raise it to A from A-. The catalysts for potential upgrades are attributed to ongoing fiscal consolidation, better governance, strong economic fundamentals, and positive public financial indicators, including the federal government’s debt-to-GDP ratio.
Meanwhile, AmBank says in its 2H24 macroeconomic report that it is unlikely for the US dollar-ringgit pair to retrace back above the 4.60 level as fundamentals and narrowing rate differentials will drive a firmer ringgit.
“However, we are taking a cautious stance on ringgit as it is vulnerable to downside risk factors that mostly come from the external front. Among them are heightening Middle East geopolitical tension, which can prompt traders towards the safer US dollar, and risks relating to the US elections as a possible Trump could raise risks of a ramping up of protectionist or unpredictable policies,” AmBank says.
On the old US dollar-ringgit peg of 3.80, Chia says there have been structural changes since the ringgit traded in that historical range, pointing out that “it is not immediately clear whether neutral rates will return to pre-pandemic mean of 2.50% (federal funds rate) or have shifted permanently higher. The latter implies diminished ‘carry-trade’ opportunities that kept the US dollar weak, especially during the era of low or zero-interest rate policy and quantitative easing”.
A narrower current account surplus would also support the ringgit through efforts to enhance export competitiveness, increase value-added output in industrial and services sectors, and realign resources to major structural shifts such as energy transition, demographic changes, supply chain relocation and digital transformation.
Another crucial factor is the relative return for domestic and foreign investors. The allocation of RM120bil in government-linked investment funds to domestic direct investments, along with the implementation of national master plans and broader fiscal and structural reforms, could be key catalysts in reversing this longstanding trend. These measures could redirect excess savings towards domestic assets, increasing domestic investment returns and attracting more foreign direct and portfolio investments.
This article first appeared in Star Biz7 weekly edition.
