Ringgit’s recovery backed by BNM’s likely rate hike

The currency is unfettered by the political noise coming from the EU, says a trading chief

By MARK RAO / Graphic By TMR

Currency traders are pricing in a rate hike by Bank Negara Malaysia (BNM) as early as January next year, and the current wind behind the ringgit could see it strengthening further against the greenback.

The local unit closed at a fresh year-high of RM4.11 against the US dollar yesterday, bolstered by hawkish central bank rhetoric and strong economic print.

Oanda Corp head of trading for Asia Pacific Stephen Innes said markets are siding to the ringgit after the massive bounce in gross domestic product (GDP) data last week, coupled with BNM likely wanting a stronger currency to mitigate inflationary pressures.

“Given their latest inflation forecast, BNM would prefer the stronger ringgit to take the edge off rising prices,” Innes said.

“A January rate hike looks all but certain, and the robust third-quarter (3Q) GDP does suggest one additional rate hike for 2018, suggesting the ringgit has quite a way to go before the currency runs out of gas.”

Oil prices have also traded higher after energy markets noted significant drawdowns in the crude oil sector supporting the ringgit’s upward trajectory. However, Innes said this could complicate matters for BNM since the central bank looks to manage inflation in the country.

He said the Malaysian currency was “unfettered” by the political noise coming from the European Union (EU), as well as the recent bid in US dollar across the broader markets.

“Equity inflow is the big positive. There was a disconnect last week (since the equity market was weaker compared to the currency), but with the bond and equity inflow accelerating, the outlook on the ringgit seems positive,” he told The Malaysian Reserve (TMR) yesterday.

Having cleared some major hurdles, the currency has set its sight on the RM4.05 to RM4.07 region as the next significant US dollar/ringgit target from a technical perspective.

Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said the ringgit appreciation has largely been driven by economic fundamentals.

“Historically, we have seen GDP growing strongly in the 3Q; the inflation rate, however, is also high,” Mohd Afzanizam told TMR.

“The risks of financial imbalance appear to be contained with household debt-to-GDP ratio continuing to go down, from 89% to 84.6% in the quarter under review in 2015.”

He said the local unit is on track to perform between RM4 and RM4.10 against the greenback by year-end, though any change in the predicted course of US Federal (Fed) fund rates in 2018 continues to put the ringgit under risk.

“At the moment, the base case is that, the Fed fund rate rise is expected to be gradual — three times in 2018,” he said.

“A change in sentiment in this respect could send the ringgit into further gyrations.”