By MARK RAO / Graphic By TMR

The ringgit exchange value remains on track to hit the RM3.90 mark against the greenback next year, as the strong Malaysian economy and higher trade with China hold out over lingering concerns tax reform in the US.

The local unit could see a reversal of fortunes if a stronger US dollar in 2018 triggers capital outflows from emerging markets (EMs).

Oanda Corp head of trading for Asia Pacific Stephen Innes said the ringgit will be the favoured Asean currency in 2018, but with a slower pace of appreciation.

“This is because of Bank Negara Malaysia’s (BNM) expected rate normalisation, a strong domestic economy as the country directly benefits from the One Belt, One Road (OBOR) trade initiative and higher projected oil prices,” Innes told The Malaysian Reserve (TMR).

He expects a dollar-ringgit exchange of RM3.90 in 2018.

Malaysia’s export sector should remain strong as the economy continues to strengthen ties with China, coupled with the optimistic view on global growth.

“I see Malaysia as a considerable beneficiary of the OBOR initiative which will open up greater collaboration for Malaysian manufacturers and mainland firms,” he said, adding China is expected to make more significant investments in core Malaysian sectors as a result.

BNM will also likely favour a stronger local currency to deflect anticipated inflation pressures, while a dovish stance from the central banks in the Group of 10 (G-10) economy bodes well for Asian currencies including the ringgit, according to Innes.

After testing a one-year high on Dec 5 at RM4.0665, the ringgit has since eased over the past two weeks to RM4.07 and RM4.08 levels.

Innes said the recent easing of the ringgit against the greenback is stemming from a “general US dollar malaise setting in”, as dollar bulls do not believe there will be sufficient economic bounce from US tax reform, while dollar bears are hoping to avoid a US dollar uptick on the tax reform announcement.

“So as long as the US Federal Reserve (Fed) remains more focused on inflation over growth, US interest rates should stay lower for longer into 2018 in the absence of inflation, supporting the global ‘Goldilocks’ or moderate economy,” he said.

“The Goldilocks economy should augur well for global stock markets including Bursa Malaysia.”

ForexTime research analyst Lukman Otunuga said the ringgit and other EM currencies could be exposed to heavy losses if the US dollar roars back to life in 2018.

“If the situation occurs where US tax reforms stimulate economic growth and the Fed then repeatedly raise US interest rates, this could heavily impact the ringgit’s performance,” Otunuga told TMR in an emailed reply.

“A strengthening US dollar could trigger capital outflows from EMs and, as such, has the ability to punish the Malaysian currency.”

He said technical traders will continue to closely observe how the ringgit-US dollar exchange behaves around the RM4.09 mark, as the year comes to an end.