Ringgit may continue to face weakness in the near term
KOTA KINABALU: The ringgit has been projected RHB Research Institute Sdn Bhd (RHB Research) to likelycontinue facing some weakness over the near term on stronger US dollar, trade war, and domestic policy uncertainty.
According to RHB Research, like other emerging economy currencies, the ringgit has been on a weakening trend in recent months, on a stronger US dollar as the US Federal Reserve (Fed) turns more hawkish, and after its second rate hike in June.
RHB Research believed that although the sharp depreciation of Turkish lira in recent months has raised concerns over a contagion effect, it is likely to be contained.
“Locally, the situation was compounded by a surprise change in the Malaysian Government following May’s general election that led to rising policy uncertainty ,” the research institute said.
“The trade war in early July between the US and China, and increasing likelihood of it worsening have also caused some flight to safety and a further weakness of the ringgit.”
“The ringgit may continue to face some weakness over the near term, in our view, and we are expecting it to weaken to 4.10 against the US dollar by end-2018.”
RHB Research also believed that the strong US dollar may persist for a while, as the US Fed is still expected to raise rates twice for the remainder of 2018, and another three times in 2019.
The research house highlighted that the trade war looks like it could prolong and is not likely to end any time soon.
“The Chinese yuan has depreciated by 3.2 per cent since end-Jun up to August 8 due to the trade war and concerns over the impact on China’s gross domestic product (GDP) growth.
“This may drag other regional currencies including the ringgit on expectation of competitive devaluation.”
On the domestic front, RHB Research viewed that policy changes and the change of heads in government-linked companies are likely to lead to a slowdown in economic activities in the months ahead.
The research institute pointed out that this, coupled with easing inflation due to the freeze on RON95 fuel prices, suggest that Bank Negara Malaysia (BNM) may not have much room to raise overnight policy rate further for the rest of the year.
In this regard, RHB Research believed the ringgit may have to shoulder most of the burden of adjustment due to capital outflow arising from major central banks’ policy tightening, thereby weakening further.
“In any case, there is potential for the ringgit to overshoot our year-end target of 4.10 but it is unlikely to weaken too severely, in our view.
“This is as Malaysia continues to enjoy a surplus in its current account in the balance of payments.”