Will the dollar still bite in 2023?
AFTER notching a 16% increase, at one point last month the greenback was up 19%. Could the dollar index gain further momentum in 2023?
What will happen to the ringgit by then. Will it touch RM5 to the dollar?
Many are waiting for that moment when the US Federal Reserve (Fed) pivots from its aggressive interest rate hikes.
The dollar may fall very sharply as huge short positions are probably being prepared in anticipation of this turning point.
That may be the big trade of 2023. However, it may not happen so soon.
This round of inflation, caused mainly by supply disruptions, could be very hard to tame. The Fed may simply hold rates for a substantive period and wait for a truly “epic fall” in inflation before it pivots.
While many are looking at a possible pivot in the first half of 2023, some are watching the still huge US budget deficit (where government spending exceeds revenue) at US$1.38 trillion (RM6.39 trillion) and consumer spending from the Us$400bil (RM1.85 trillion) student loan forgiveness plan.
Such buoyant spending will keep price pressures strong possibly into the third quarter of 2023, according to former Inter-pacific Securities head of research Pong Teng Siew.
Coming to the ringgit, remember the cry: “See you at five’’ during the 1997 Asian Financial Crisis?
“We are almost there with more Fed rate hikes already baked in,” says Pong.
For the dollar/ringgit to touch five, there should be a confluence of factors, which currently is not the baseline for Maybank Investment Bank.
Within this confluence of factors, there needs to be continuous: > Aggressive US rate hikes > Weakness in China’s growth > Rise in global inflation amid concerns over commodity prices
“We are seeing dollar/ringgit at around 4.80 by end of 2022, and
4.50 to 4.60 by end of 2023,” says Maybank Group foreign exchange research head Saktiadi Supaat.
According to RHB Banking Group, it is unlikely for the ringgit to hit five to the dollar.
“Our forecast is 4.60 to 4.70 in the fourth quarter of 2022, and 4.70 to 4.80 in the first half of 2023, gradually gaining ground towards 4.55 to 4.65 in the second half of 2023,” says RHB Banking Group head of rates and foreign exchange strategy Suresh Rama.
Noting the strong correlation of the ringgit and rupiah to the yuan in the last couple of months, United Overseas Bank (UOB) expects continued, negative spillover effect from yuan weakness in the coming quarters.
UOB forecast the ringgit at 4.80 to the dollar in the fourth quarter of 2022, 4.84 in the first quarter of 2023, and 4.88 in both the second and third quarters of 2023.
Maybank Group expects the ringgit to remain under pressure over the next few months, as long as the dollar remains supported amid strong US data, global growth concerns and yuan weakness.
Further pressure is expected on the ringgit with Bank Negara still catching up on the rate hike cycle, softer oil prices and any uncertain domestic election outcome.
The dollar could peak in the first half of 2023, entering a cyclical decline against other currencies as the Fed’s rate tightening cycle is expected to cool off amid a recession in the United States, according to Socio Economic Research Centre executive director Lee Heng Guie.
While the Fed may hold rates higher, the rate differentials between the United States and abroad will not likely widen further as the Fed pulls back.
“What we need now is the Fed confirming the slowdown in rate hikes and a more convincing cooling off in other price-related pressures,” says OCBC Bank (M) foreign exchange strategist Christopher Wong.
The indicators include wage growth. The Institute of Supply Management Manufacturing Prices Paid index points to the degree of inflationary pressures, the Fed supply chain index, freight charges and oil prices.
The Fed will likely be even more data-dependent, going into the Federal Open Market Committee meeting from Dec 13-14, which is expected to see a downshift to a 50 basis points (bps) hike from 75 bps currently.
However, policy calibration does not mean that the Fed is done with tightening; rates are still elevated and going higher albeit at a potentially slower pace.
Confirmation of policy calibration can lead to a moderation in dollar strength – one risk is that the ensuing dip in dollar strength may be shallow, depending on the extent of global deceleration, says Wong.
The latest purchasing managers’ indices, an indicator of the health of the economies, of China, Malaysia, Taiwan and South Korea, are in contraction territories.
Other than US rate hikes, the strength of dollar/ringgit could be partially driven by domestic political developments.
However, most of the US rate hikes have been factored in and Etiqa Insurance and Takaful chief strategy officer Chris Eng does not expect much more weakness in the ringgit/dollar exchange rate.
The Fed pivot has to be viewed with caution.
The dollar may weaken dramatically but possibly not for long as it may be supported by, among other things, its safe haven status amid problems in other economies.