Ringgit likely to soften after strong rebound

> Dollar weakness might dissipate with a boost from US tax reform

PETALING JAYA: Despite the ringgit continuing with its upward trend after breaking the psychological barrier 4.0 level last Friday, economists cautioned that the local currency might take a breather in view of the US Fed tightening cycle and a boost for the dollar, from the US tax reform.

The ringgit has joined a basket of other regional currencies in an appreciating trend against the US dollar mainly due to the weakness in the dollar.

In its note yesterday, Kenanga Research said that while the ringgit may test the 3.95 level in the first quarter of 2018, it may retrace back to around 4.10.

Fundamentally, Socio-Economic Research Centre (SERC) executive director Lee Heng Guie said, the ringgit should be worth 3.6 to 3.7 against the greenback.

“However, it does not mean that the ringgit will hit this level this year as it will be affected by other domestic and external factors,” he told SunBiz.

Over the short term, Lee believes the ringgit will stay at the current level with a projection of 3.90 by year-end.

The ringgit strengthened as much as 0.3% to 3.9865 yesterday. As at 5pm, it traded at 3.9955 against the greenback. The local currency has risen 1.3% since the start of the year after a 10.4% gain last year.

Kenanga Research said the ringgit is expected to experience volatility in the face of widely expected US Fed tightening of at least three 25-basispoint rate hike for the year.

Furthermore, it said the current weaknesses in US dollar might dissipate as the new US tax reform proceeds and provides a boost to its economy and currency, therefore implying a softer ringgit against the dollar.

“As a result we might see the ringgit, at times, under some pressure to weaken though it is partly supported by strong fundamentals and positive sentiment.”

FXTM chief market strategist Hussein Sayed highlighted that the dollar index fell to a three-and-a-half-month low to trade below 92, leaving many traders wondering whether this year will be another devastating one for the greenback.

“When looking at the Commitment of Traders report, speculators are not showing interest in buying the US dollar yet, and the latest group of data did nothing to support the dollar.”

Given that the major US economic releases are four days away, he said many traders will focus on whether any technical breakouts will occur.

Besides weak US dollar, Lee noted that the ringgit strength is also supported by positive sentiment in the run-up to the 14th general election and rising oil prices.

“The US is entering into the weak cycle trend, the market needs more confirmation on what the US Fed wants to do as well as the impact from the tax reform.”

The US Fed has set three rate hikes this year, while the first Federal Open Market Committee meeting is scheduled for Jan 30 and 31.

Domestically, Lee said the catalysts for the ringgit include a continued trade surplus, albeit smaller at RM9.9 billion in November against RM10.4 billion in October, as well as the consolidation of fiscal budget and the government debt remains below 55% of the gross domestic product.

Despite the positive sentiment towards the general election, Lee also cautioned that there will be some degree of uncertainty when the Parliament is dissolved soon.

Meanwhile, AmBank Research expects the US dollar/ringgit to remain on a strong note with end-2018 projection of 3.95 and 3.76, being the base case and best case scenario.

“Our full-year average outlook for the US dollar/ringgit is 4.00–4.02 as our base case and best case at the 3.80–3.82 levels.”