Ringgit could reach RM3.95 as early as this month

An analyst says the ringgit could be supported as the US dollar remains under pressure

By NG MIN SHEN / Graphic by TMR

The ringgit — which has been on a gradual path of strengthening in recent months — may have legs to appreciate further in the near term, in light of favourable global and domestic operating conditions.

ForexTime Ltd research analyst Lukman Otunuga said the ringgit could be supported as the US dollar remains under pressure, while investigators look into the likelihood of US tax cuts stimulating economic growth in the country.

“From a technical perspective, the ringgit against the US dollar is incredibly bearish on the daily charts — with RM3.95 looking like a near-term target within this month,” he told The Malaysian Reserve (TMR) when contacted.

As at 5.55pm yesterday, the ringgit was at RM4.0145 against the greenback, its strongest point for the day’s range, while its weakest was at RM4.0278. It opened at RM4.0197 yesterday against the close of RM4.0195 on Tuesday.

The ringgit rose to a 16-month high of RM4.016 against the greenback for the New Year, supported by a hawkish central bank position and an overall weaker US dollar narrative.

Otunuga said the strengthening trend appears to be sustainable, considering how market expectations of a hike in the Overnight Policy Rate (OPR) this year are likely to fuel the ringgit’s upside.

“The increasingly bullish sentiment towards the Malaysian economy remains a key factor in propelling the ringgit against the dollar. While the ringgit has been on a strong run in recent months, it is likely to rally further this quarter if the dollar continues to weaken,” he said.

He added that further upside could be on the cards for the currency, which he

deemed “still somewhat undervalued amid steadily improving macroeconomic conditions”, following a positive trading year in 2017.

“While it may be difficult to determine the ringgit’s fair value, a vulnerable dollar coupled with an OPR hike by the central bank is likely to result in the local currency appreciating further this year,” Otunuga said.

Meanwhile, Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said the ringgit is expected to range between RM4 and RM4.10 in the near term as potential headwinds from abroad — particularly in the US — remain at large.

“However, from technical readings, the ringgit could potentially strengthen to RM3.98. So, we are hopeful that the ringgit would have more legs to stage further appreciation,” he told TMR.

Mohd Afzanizam added that the sustainability of the trend depends largely on the prospects of the US Federal Reserve (Fed) interest-rate hikes.

“It really boils down to the inflation dynamics in the US which at the moment are still contained, given the modest gain in wage growth. Also, the prevailing inflation rate is still lingering below the 2% target.

“If such an investment thesis holds, we should expect further appreciation of the ringgit,” he said.

Risks that could weigh down the currency include aggressive Fed rate hikes — especially with the upcoming change of Fed chairmanship in February, as current chair Janet Yellen’s term expires then.

A severe slowdown in China would also impact the ringgit, as would geopolitical risks that could result in flight-to-quality.

On a fair value estimate, Mohd Afzanizam said the ringgit stands at about RM3.51 when traced back against US dollar averages from July 2005 until now.

“Assuming mean reversion could happen and continue to happen, we could see the ring- git moving towards this direction,” he said.

Industry experts have predicted the ringgit to strengthen to below RM4 in 2018, following a comeback of sorts in 2017, helped by stronger fundamentals such as the higher than expected gross domestic product growth, improving crude oil prices and manageable inflation.

Forecasts largely range between RM3.90 and RM3.95 for the year, on expectations for inflation and credit cycle trends to remain benign, while the current account balance remains stable, in addition to continued domestic growth potentially boosted by rising oil prices.

TMR reported recently that with easy money becoming available worldwide, investors are now turning to underperforming markets, among which Malaysia was a standout last year.

The central bank’s preference for a stronger local currency coupled with US President Donald Trump’s fiscal policies implying an overvalued dollar are also paving the way for the ringgit to make a bullish run in 2018, a senior foreign-exchange analyst said.