Ringgit slips as US tax reform bill faces hurdles

The local unit slumped against the dollar with a 0.22% drop as the greenback firmed on optimism surrounding the US tax legislation


THE rally in the ringgit suffered a minor setback yesterday as uncertainties around a tax shake-up in the US saw investors adopting a “wait-and- see” mode.

The local unit slumped to RM4.075 against the dollar yesterday, a 0.22% drop, after opening at RM4.0645 as the dollar firmed on optimism surrounding the tax legislation.

Australia and New Zealand Banking Group Ltd head of research Khoon Goh believes the momentum could well extend in the near term to push the local unit towards the RM4 mark against the US dollar.

He said the ringgit’s gains appear to be “overextended” and a retracement could occur against the greenback, but a stronger global growth outlook and higher oil price will provide an offset for a firmer ringgit.

Oanda Corp head of trading for Asia Pacific Stephen Innes added that the ringgit rally could run deeper if the economic and monetary policy stars align.

“While upcoming elections could cause a hiccup, a stronger currency would be a definite signpost that the economy is doing exceptionally well, so we
could see the government lending support to the stronger ringgit narrative for an election campaign bounce,” Innes said.

The greenback’s gains could be short lived amid growing concerns of a possible US government shutdown with its federal budget deadline looming.

Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said despite the pullback, the tax overhaul narrative will likely see the ringgit appreciating further given the overall improvements in global demand.

“The US tax reforms imply fiscal policy is expected to be on expansionary mode. This suggests aggregate demand will be supported by the tax cut measures, which is good for economic growth. It also gives more reason for the US Federal Reserve to normalise their rates in 2018 — all of which should be good for the ringgit,” Mohd Afzanizam told The Malaysian Reserve.

The ringgit has appreciated by 9% this year, with significant advances made in recent weeks buoyed by expectations of a tighter monetary policy from Bank Negara Malaysia.

The Monetary Policy Committee (MPC) last month maintained the Overnight Policy Rate at 3%, but noted it may review the current degree of monetary accommodation in Malaysia in light of the bullish outlook for growth.

The MPC’s hawkish tilt has seen foreign-exchange market pricing in a probable rate hike in January.

“We are looking at the ringgit to settle the between RM4 and RM4.10 by the end of 2018,” Mohd Afzanizam said.