Prospect of US rate hike weighs on ring­git

The Sun (Malaysia) - - SUNBIZ -

PETALING JAYA: MIDF Re­search, which re­vised its ring­git 2016 year-end forecast to 4.35 to the dol­lar from 4.10 to the dol­lar, ex­pects the Malaysian cur­rency to re­main un­der pres­sure due to an im­mi­nent rate hike by the Fed­eral Re­serve next month.

“The mar­ket is an­tic­i­pat­ing Trump’s stim­u­lus pledge es­ti­mated at more than US$550 bil­lion (RM2.4 tril­lion) to spark in­fla­tion, higher growth and even­tu­ally forc­ing the Fed to raise in­ter­est rates at a faster pace than ear­lier an­tic­i­pated. Traders are pric­ing in a 98% prob­a­bil­ity for 25 ba­sis points (bps) De­cem­ber rate hike on Nov 18, up against 84% the week be­fore,” it said in its re­port yes­ter­day.

It noted that the US dol­lar drew strength, with the dol­lar in­dex mov­ing past the 100 points for the first time this year while the ring­git, along with other emerg­ing mar­ket (EM) cur­ren­cies, took a hit. The ring­git closed at 4.4183 on Nov 18, down by 4.9% since Nov 8.

The net for­eign out­flow from the equity mar­ket for this month as of Nov 18 stood at RM2.57 bil­lion, re­flect­ing the biggest out­flow since May this year but de­spite the sell-off, the ring­git could re­peat last year’s post-Fed rate hike rally.

“Re­call that for­eign funds re­turned to emerg­ing markets in­clud­ing Malaysia early this year as the Fed turned dovish as US eco­nomic data was worse than ex­pected. The planned four rate hikes did not ma­te­ri­alise and, at some point, the mar­ket lost con­fi­dence in the Fed do­ing any­more rate hikes this year. We think a sim­i­lar sit­u­a­tion could hap­pen in 1H17,” said MIDF Re­search.

It said lead­ing in­di­ca­tors are point­ing to­wards fur­ther mod­er­a­tion in US eco­nomic growth and pri­vate in­vest­ments have been in the neg­a­tive for three con­sec­u­tive quar­ters while cor­po­rate earn­ings are set to reg­is­ter the sixth suc­ces­sive de­cline.

The re­search house is scep­ti­cal about whether the US gov­ern­ment will have the money to pur­sue Pres­i­dent-elect Don­ald Trump’s fis­cal pol­icy man­i­festo, which in­cludes cut­ting taxes and spend­ing on in­fras­truc­ture.

“Note that the fed­eral debt limit will be re­in­stated in March 2017, and with the US cur­rent debt level close to US$20 tril­lion, it is yet to be known whether pres­i­dent-elect Trump will be able to fol­low through with his eco­nomic plan. How­ever, we ex­pect the cur­rent high yield and flow of funds into the US econ­omy will con­tinue un­til the Fed con­ducts the widely ex­pected rate hike in De­cem­ber 2016. Un­til then, the ring­git is likely to re­main un­der pres­sure,” MIDF Re­search said.

It added that the sit­u­a­tion could turn for the bet­ter af­ter Trump en­ters of­fice on Jan 20, 2017 as clar­ity on much an­tic­i­pated pol­icy direc­tions with re­gard to stim­u­lus pack­ages, trades and for­eign en­gage­ments will pro­vide bear­ing on the ring­git’s per­for­mance for the rest of 2017.

Post-elec­tion, Trump’s ac­cep­tance speech “soothed” the mar­ket and seemed to in­ject higher in­fla­tion ex­pec­ta­tions via an­tic­i­pated stim­u­lus pledges.

“We think greater ex­pec­ta­tion of in­fla­tion­ary pres­sure is trans­mit­ted and re­vealed in the cur­rent con­di­tions of the bond mar­ket. Re­gard­less, the higher ex­pec­ta­tion has prob­a­bly given what Yellen needs, a green light to pro­ceed with the 25bps rate hike in the last of 2016 FOMC meet­ing come this Dec 14,” it said, re­fer­ring to Fed chair Janet Yellen.

It sees the ring­git re­main­ing un­der pres­sure with range-bound trad­ing be­tween RM4.35 and RM4.45 to the dol­lar through­out year-end.

MIDF Re­search ex­pects the ring­git to gain, es­pe­cially in 1H17, on the pre­sump­tion that com­mod­ity prices will sta­bilise at higher prices, and the US econ­omy con­tin­u­ing to un­der­per­form, record­ing be­low 2% year-on-year growth.

How­ever, it main­tained its forecast of an­other Overnight Pol­icy Rate (OPR) cut next year as the mod­er­a­tion in the Malaysian econ­omy has yet to re­cede, lead­ing the bench­mark in­ter­est rate to set­tle at 2.75% by end-2017.

“This is be­cause de­spite our ex­pec­ta­tion of a bet­ter trade per­for­mance next year, the lagged im­pact of slow trade ac­tiv­ity this year will only start to pre­vail in 1H17, lead­ing to a rel­a­tively weak do­mes­tic econ­omy in 1H17,” it said.

MIDF Re­search ex­pects the OPR to re­main at 3% at the MPC meet­ing to­mor­row.

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