Ringgit on track to hit RM4.20 by year-end

Newsflow on 1MDB is beginning to weigh less on markets as investors have mostly priced in the issue

By MARK RAO / Pic By TMR

Fund inflows into ringgit-assets will help the local unit sustain its stronger exchange value, said currency analysts.

Oanda Corp Asia-Pacific head of trading Stephen Innes said the ringgit’s move to test the RM4.20 level against the US dollar is a significant appreciation as it represents the post-US election gap experienced in November last year, which caused Bank Negara Malaysia to intervene in the non-deliverable forward markets.

“It appears the bulls are coming out on mass supported by a decent carry, a stable to strong currency, the 1Malaysia Development Bhd (1MDB) risk being in the rear-view mirror and Malaysia’s macro fundamentals looking solid,” Innes noted.

He told The Malaysian Reserve the “carry trade” refers to investors buying higher yielding riskier assets, with the yield-to-risk reward attractive on Malaysian bonds and the ringgit.

Newsflow on 1MDB is beginning to weigh less on markets as investors have mostly priced in the issue, with foreign investors now looking past it.

“Firming oil prices of late are also supporting the ringgit’s cause, while Bank of Canada’s rate hike put the reflation trade back on the burner and this is good for commodities,” he said.

Innes has a year-end target of RM4.20 providing the dovish US Federal Reserve (Fed) narrative plays out, with upside resistance now at the RM4.30 level.

Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said the main factor currently influencing the ringgit is the Fed and its plans to scale down its balance sheet.

“The message is that the rate hike campaign is going to be very gradual. The Fed needs to articulate its strategy on how it is going to reduce its US$4.5 trillion (RM18.9 trillion) balance sheet size,” he said.

He said the move by central banks in Indonesia, India and Vietnam to reduce their policy rates has improved the ringgit’s appeal, while a weak policy traction by the Trump administration will drive the ringgit to a higher level.

Malaysia’s improving fundamentals imply the country’s Overnight Policy Rate can be maintained throughout this year and have a possible upward review sometime next year he noted.

The ringgit performed 0.34% higher against the US dollar at RM4.2118 yesterday, on the back of Malaysian exports surpassing market expectations.

Malaysian exports grew by 30.9% year-on-year (YoY) in July, well above the 23% anticipated by the market, while trade surplus stood at RM8.03 billion — lower than the RM9.83 billion recorded in June.

Year-to-date, trade surplus is up by 16.3% YoY to RM51 billion.

Crude oil prices have also been trending higher recently, propped up just above US$54 per barrel, with the oil market seemingly heading for a rebalancing, while crude palm oil prices continue to perform strongly in the country at above RM2,700.

He said rising oil prices, current account balance and foreign-exchange reserves will act to improve the credit matrices for Malaysia’s sovereign rating.

“These factors would allay concerns on the creditworthiness of the Malaysian government to some extent.”