Ringgit set to gain on potential Fed rate cut, stronger oil prices

The Fed’s decision on lending rates is a key pivot for the ringgit’s further gains

by MARK RAO/ pic by BLOOMBERG

THE ringgit is poised to strengthen against the US dollar on higher oil prices and if the US Federal Reserve (Fed) continues to deploy monetary easing, while improved US-China trade ties is bolstering risk sentiment.

Malaysia’s local note has made significant strides against the US dollar since hitting a 22-month high of RM4.2203 on Sept 3 this year, appreciating 1.3% to close at RM4.1652 last week.

A key pivot for further gains for the Malaysian currency will be the Fed’s decision on lending rates after the Federal Open Market Committee concludes their meeting tomorrow.

If the US central bank opts to lower the benchmark interest rate, in line with market expectations, regional and risk-based currencies such as the ringgit are set to strengthen against the dollar.

Oanda Corp senior market analyst for Asia Pacific Jeffrey Halley said the ringgit could appreciate to as low as the RM4.05 level on monetary easing by the Fed and higher energy prices.

“If oil prices remain elevated as I expect they will, and the Fed moves to an official easing bias this Wednesday, we could see ringgit strength pushing the US dollar-ringgit exchange down to the RM4.05 region,” he told The Malaysian Reserve (TMR) yesterday.

The drone attacks on critical Saudi Arabian oil facilities disrupted some 5.7 million barrels of oil per day or 5% of global daily production, causing the benchmark Brent futures contract to register its highest intraday increase since the contract was launched back in 1988.

Supply disruptions and an escalation in geopolitical tensions will likely see crude oil trading pricing in a premium for the remainder of the year.

FXTM market analyst Han Tan said the Fed is widely expected to lower rates by a further 25 basis points this week, with another rate cut possible before year-end.

“Fed chairman Jerome Powell’s press conference would be scrutinised, whereby more dovish tones out of the world’s most influential central bank could make for a softer-dollar environment, while offering limited relief for Asian currencies,” he said in a research note last Friday.

For this week, as markets shift expectations surrounding the Fed’s policy outlook — as well as the US-China trade conflict — the US dollar-ringgit exchange could find support around its 200-day moving average at RM4.14, while the immediate resistance line can be seen at the RM4.19 level, the online foreign-exchange trading broker noted.

Bank Negara Malaysia (BNM) last week opted to hold its Overnight Policy Rate (OPR) at 3% after the cut in May.

A Fed rate cut this week will provide Malaysia’s central bank sufficient buffer to lower the OPR for the second time in 2019 when the Monetary Policy Committee meets for the last time this year in November.

Monetary easing is typically deployed to manage the domestic economy and BNM is widely expected to lower lending rates come November to guard against a slew of external risks — largely centred on the US-China trade front and global growth.

But relations between Washington and Beijing have improved over recent weeks with US President Donald Trump deciding to delay a planned tariff increase on US$250 billion (RM1.04 trillion) worth of Chinese goods on Oct 1 this year by two weeks.

This prompted Beijing to add American farm goods to 16 types of US products that will be exempted from tariffs, at least until Sept 16, 2020.

AxiTrader Asia-Pacific market strategist Stephen Innes said easing US-China trade war conditions need to be read in light of the resultant economic issues facing both countries.

“We need to take the calming trade narrative seriously. The US president wants to protect the chunk of the economy that trade war was supposed to defend, and that is the manufacturing industry,” he told TMR yesterday.

“I think the economic issues are causing both sides to reconsider their scorched earth trade policies.”

China’s industrial production for August noted its lowest growth in over 17 years, while US’ manufacturing sector was also hurt by the protracted trade war.

“I think the ringgit will continue to benefit from trade war neutrality and Fed easing, as its easing offers BNM the policy wiggle room to lower rates which will be good for bond and equity market inflows,” Innes said.

Malaysia was among the victims to an aggressive Fed direction in the past which saw US interest rates raised four times in 2018, prompting investors and funds to shift to the US bond market for better yields.

Malaysia’s equity and bond markets registered total net outflows of RM11.7 billion and RM21.1 billion respectively that year, while the ringgit depreciated by 2.7% against the US dollar.