US politics, low inflation seen supporting ringgit

> However, factor that will determine Malaysian currency’s performance for the rest of the year is still the dollar, says analyst

PETALING JAYA: Political uncertainty in the US and concerns over stubbornly low inflation weighing heavily on the prospects of higher US interest rates will most likely support the ringgit, said ForexTime Ltd (FXTM) research analyst Lukman Otunuga.

“The factor that will affect the ringgit’s performance for the rest of this year is still the US dollar. A vulnerable US dollar is also likely to attract investors towards the internal bond markets, which could further boost buying sentiment towards the ringgit,” he told SunBiz.

He said the growing confidence in Malaysia’s economy and the overall encouraging outlook is likely to have a positive impact on the ringgit’s performance for the rest of this year, whilst further supporting buying sentiment.

“It is difficult to say where the ringgit may conclude this year, especially when considering how, like most emerging market currencies, its outlook remains impacted by the US dollar’s direction,” he added.

He said the Dollar Index is already sinking towards 91.00 and potentially dipping to levels not seen since 2014, which is good news for emerging markets including Malaysia.

Otunuga said Malaysia’s improving macro fundamentals should be good for the ringgit and its outlook this year end.

“Domestic economic growth expanded 5.7% in the first half of 2017, while the nation’s trade balance data, as a whole, has been above expectations for the most part of this year. With Bank Negara Malaysia optimistic over the nation’s economic health and Malaysia’s rate of inflation stabilising, the outlook remains highly encouraging and as such, should benefit the ringgit,” he added.

Looking back at the performance of emerging market currencies so far this year, he said the majority of these currencies entered the year under intense selling pressure, with some even finding comfort at oversold levels as President Donald Trump’s protectionist stance sparked fears over the future of global trade.

He said investors priced in much of Trump’s “market-shaking promises” but very little, if anything at all, has come to fruition so far and market players have realised the difficulty Trump will face with legislative reforms, which is likely to have a very negative impact on the greenback.

“With uncertainty over Trump’s next moves, political instability in Washington and fading rate hike expectations all weighing heavily on the currency, US dollar weakness is set to remain a dominant theme. This is very positive for emerging market currencies and has been a catalyst for the gradual ringgit correction over recent months,” he said.

“When considering how emerging market currencies still have higher yields against developed currencies and investors are acknowledging that they are oversold, it makes sense that market players are pouring money back into emerging markets,” he added.

Meanwhile, HLIB Research forecast the ringgit to trade at RM3.90 against the dollar next year, should the US Federal Reserve (US Fed) keep up to its schedule for the interest rate hike and balance sheet unwinding exercise.

This could be further made possible by a potential war outbreak.

The research house has revised its ringgit forecast for the year, to between RM4.10 and RM4.25 against the greenback.

“We are turning mildly positive on ringgit after the recent sharp rebound. We now see ringgit appreciation bias to be sustained by a confluence of domestic and external factors,” HLIB said.

External factors such as the synchronisation process between global growth and monetary policy, will continue to exert downward pressure on the US Dollar, while the ringgit is set to be boosted by firmer crude oil prices.

On the domestic front, low foreign holdings in upcoming maturities and higher export proceeds conversion from strong trade surplus are seen as positive for the ringgit.