Ringgit may continue to weaken following no change in FOMC rate
KUCHING: With the US leaving its benchmark policy rates unchanged yesterday, analysts peg the local ringgit to continue experiencing weakness against the US dollar.
The Federal Open Market Committee (FOMC) maintained its current 0.25 to 0.50 per cent target range for the federal funds rate.
Assessment of the US economy was broadly positive compared to the previous statement on June 15. The FOMC said pace of labour market improvement has strengthened with stronger job gains.
Economic activity expanded by moderate pace with consumer spending growing strongly but softness in investment remained. The FOMC said near-term economic risks have diminished. There was no revision in economic projections.
The FOMC statement was slightly hawkish, said analysts with Hong Leong Investment Bank Bhd (HLIB Research), as economic assessment has turned upbeat with resumption of improvement in the labour market conditions.
“After witnessing a swift recovery in global financial market post-Brexit kneejerk, FOMC is less concerned about impact of external developments on domestic growth momentum, leadi ng to the conclusion that ‘near-term economic risks have diminished’,” it said in a note yesterday.
“We continue to opine that sustained improvement in labour market dynamics is crucial in generating demand-led inflati on towards the Federal Reserve’s two per cent goal.
“The persistent low unemployment rate and recent pick-up in job gains have led to a higher average hourly earnings growth.”
The improvement in labour market conditions, if sustained, will induce stronger consumer spending and eventually lead to higher inflation expectations, HLIB Research said.
On the flip side, productivity growth continues to slacken given the persistent softness in fixed investment and ageing population.
“Given the diminishing external risk amid resumption of labour market improvement, we maintain our forecast of one rate hike of 25bps by FOMC in December.
“We expect more strength in the US dollar as the path is again cleared for resumption of FOMC rate normalisation.
In addition, the looming monetary stimulus by BOJ and potentially more quantitative easing by the European Central Bank towards later part of 2016 will make US dollat attractive again from growth/ rate differential angle.”
In this regard, currencies of the Emerging Markets, including the ringgit, may still experience weakening bias against the US dollar.
“The ringgit appreciated earlier this month driven mainly by fund inflows amid global search for yield after Brexit fear.
“However, the renewed governance issue and RMB depreciation caused the ringgit to weaken again since mid- July.
“The resurgence of domestic concerns coupled with a clearer path for Fed rate hike may cause ringgit to trade sideways in the near term.
“We maintain our ringgit forecast range of RM4 to RM4.20 per US dollar in the second half of 2016.”