New Fed chair’s actions to influence ringgit’s movement

Analysts, however, say markets remained cautious on the course of US monetary policy

By MARK RAO / Pic By ISMAIL CHE RUS

The ringgit’s performance will continue to hinge on US monetary policies, including interest-rate changes made by the new US Federal Reserve (Fed) chairman.

The local unit has performed very well this year — being among the world’s best currencies — strengthening 5.6% in value against the greenback this year alone.

The Budget 2018 announcement on Oct 28 was positive for the ringgit. The rising crude oil prices, with the Brent reaching US$60 (RM254.40) a barrel compared to US$44 a barrel in June, has helped the country’s currency to strengthen further.

Analysts, however, said markets remained cautious on the course of US monetary policy.

Dr Mohd Afzanizam Abdul Rashid

Mohd Afzanizam adds that the ringgit is still externally driven, especially by US rates
(Pic by Ismail Che Rus/TMR)

Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said the ringgit could settle between RM4.10 and RM4.20 by year-end, but cautioned that the next Fed chairman will decide the pace of interest-rate normalisation.

“The ringgit is still externally driven, especially by US rates,” Mohd Afzanizam told The Malaysian Reserve in an emailed reply.

“In fact, Malaysia’s government bond yields are highly correlated with US Treasury yields. Therefore, any change in the US monetary policy will have an immediate effect on local bond yields.”

US President Donald Trump had nominated Fed governor Jerome Powell as the next chairman of the all-powerful central bank, replacing Janet Yellen.

Mohd Afzanizam said fixed income fund managers in the country should keep the duration fairly short in order to reduce interest-rate risks which are predominantly determined by the Fed fund rate.

Foreigners have already been exiting the local equity market in the last few weeks. The ringgit was trading about RM4.22 against the greenback last Friday.

The currency also improved to its strongest rate this year when it performed at RM4.1875 against the US dollar on Sept 20 — bolstered by improving exports, trade and domestic consumption.

Oanda Corp head of trading for Asia Pacific Stephen Innes said the majority of central banks within the

Group of 10 nations are turning doish, signalling a return of investment flows which should offset Malaysia’s risk to higher US interest rates and a stronger US dollar.

“More so, given the trial and error approach the Fed will take to reduce the balance sheet — implying that regardless who takes the helm at the Fed, interest-rate normalisation may not deviate too far from the current dot plot,” Innes said.

He said Malaysia’s Budget 2018 allocation is also positive for the ringgit, as it is geared towards maintaining stability in both the foreign-exchange and bond markets through fiscal prudence.

“Also, the financial burden of lower oil prices in 2017 will be offset by Goods and Services Tax receipts, where income tax is anticipated to make up almost half of Malaysian government revenue amid robust economic growth,” he said, adding that improving oil prices will also be viewed positively by markets.

Mohd Afzanizam said fiscal deficit in the country is within a tolerable zone of below 3% of gross domestic product.

“This should be credit-positive and we have seen credit default swap spread hovering at 63 basis points, which is low by historical standards,” he said.

“In addition, the growth projection of more than 5% next year also suggests that the economy is likely to operate at or slightly above its potential level.”