By MARK RAO / Pic By BLOOMBERG

The ringgit tested its strongest level against the US dollar in over five months after the US Federal Reserve (Fed) opted to maintain interest rates, boosting the local unit on the widening trade surplus.

The ringgit, which had a good start for the year, could rally to the RM4.00 level in the near term.

Fed chairman Jerome Powell said the case for raising rates has “weakened somewhat” after the Federal Open Market Committee (FOMC) left its benchmark interest-rate target unchanged at 2.25% to 2.5% last Wednesday.

The US central bank will also be patient with further rate hikes and be flexible in regard to the pace of balance sheet normalisation, he added.

This has been the strongest indication yet that the US rate hike cycle is to take a pause in 2019 after the Fed raised lending rates four times last year.

The news sent investors fleeing from the US bond and dollar markets, pushing the greenback lower and driving emerging-market (EM) currencies, including the ringgit, to a higher close.

The local note appreciated to RM4.08 against the greenback last Thursday, following the FOMC decision — its lowest level since Aug 10, 2018.

Oanda Corp senior market analyst Jeffrey Halley said the level of dovishness from the Fed exceeded market expectations and is unlikely to be fully priced in yet.

This should continue to provide a welcome tailwind to equities and EM currencies which are highly sensitive to the direction of US
interest rates, he said.

“With the ringgit sitting on support at RM4.09 against the US dollar at the moment, it is entirely possible that a break can open a rally in the ringgit towards RM4.00 in the near term,” he told The Malaysian Reserve (TMR).

“The Chinese New Year celebration in Asia this week will mute regional EM foreign-exchange trading, but assuming no bad surprises from the ongoing trade talks, the outlook should remain constructive for the ringgit.”

He said the main barrier to a sustained upswing in EM currencies is the ongoing trade talks between the US and China, which will mute rallies until the outcome of the discussions becomes available.

Malaysia’s total trade increased by 5.9% to RM1.88 trillion in 2018, higher than the RM1.77 trillion recorded in 2017, while trade surplus widened by 22.1% to RM120.27 billion, the fastest rate in 10 years and the largest trade surplus since 2012.

On concerns over a slowdown in the Chinese economy, Halley said China has turned on the stimulus taps again via public works, but there will be at least a quarter lag before they become noticeable.

Malaysia’s trade exposure to China makes it susceptible to any declines in the Chinese economy.

FXTM research analyst Lukman Otunuga said markets interpreted the FOMC’s “patience” towards interest rates as a significant change in tone by the Fed and it appears to weaken a major hurdle for EM currencies.

However, risk appetite may be contained by other geopolitical risk factors such as plateauing global economic growth and unresolved US-China trade tensions, he cautioned.

“Until positive developments crystalise on those fronts, these factors could still cap the upside for Asian currencies in the near-to-medium term,” he told TMR.

Otunuga said the ringgit is seen as challenging the RM4.08 psychological point against the US dollar in the near term, which is also where the 200-day moving average resides.

“More clarity on US-China trade relations coupled with further gains in oil prices may boost tailwinds for the Malaysian currency,” he said.

“The ringgit remains supported by Malaysia’s resilient domestic economic fundamentals as evidenced by December’s export growth beating expectations.”

The commodity-linked currency found support in the uptrend in crude oil prices over the past month which saw Brent oil rallying from US$53 (RM216.77) per barrel to as high as US$62 per barrel last week.

However, the oil market still faces oversupply concerns as US production is predicted to reach 12 million barrels a day this year, while the ability of OPEC and its partners to control the market remains in doubt.

“Oil will struggle to break US$63 per barrel on Brent and US$55 per barrel on West Texas Intermediate,” Halley said.

“Putting it simply, oil will need to have a major rally before the street starts including it in their ringgit forecasting.”

Meanwhile, Otunuga said investors may look to oil prices for further guidance on the ringgit direction given the Fed’s latest signal to markets and the potential developments from US-China trade talks which are set to conclude in March.