Prospect of US rate hike weighs on ringgit

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.