Forex market awaits BNM’s rate decision

The ringgit made significant ground against the greenback last Friday, appreciating 0.5% to trade as low as 4.1638 against the week prior

by MARK RAO/ pic by TMR GRAPHIC

THE ringgit is expected to trade around the 4.16 mark in the near term, supported by lower US interest rates and a weaker dollar, though headwinds remain in the form of slowing economic growth.

Malaysia’s local note made significant ground against the greenback last Friday, appreciating 0.5% to trade as low as 4.1638 against the week prior.

The bulk of the gains were noted after the US Federal Reserve (Fed) lowered its benchmark interest rate for the third time in 2019, as the central bank hinted this could be the last cut for the year.

Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said the ringgit could find support as the Fed is seen as taking a somewhat aggressive approach towards monetary policy accommodation.

“Based on technical readings, the current support level stood at 4.1628 per US dollar,” he told The Malaysian Reserve (TMR) last week.

“The US dollar-ringgit exchange rate could gyrate around this level in the immediate term.”

Continued US dollar weakness, arising from Beijing pouring cold water over prospects of a long-term US-China trade deal materialising and larger concerns over economic growth, will also bolster the ringgit’s performance.

This could be a big week for the foreign-exchange (forex) market as Bank Negara Malaysia (BNM) is to decide on its own monetary course when its Monetary Policy Committee meets tomorrow.

After having lowered the Overnight Policy Rate by 25 basis points to 3% in May, there are growing expectations that BNM will opt to keep the benchmark lending rate steady for now.

This could see an uptick in demand for Malaysian assets by traders hunting for higher yields amid the slowdown being observed across financial markets.

Weak domestic economic data, however, could force the central bank’s hand to take an easing bias to bolster the local economy.

Malaysia’s Producer Price Index (PPI) fell 2.4% year-on-year in September, while weakness in the export sector is expected to persist.

Further weakness in the Chinese economy will adversely impact Malaysia due to the trade exposure to Beijing.

China is Malaysia’s largest trading partner behind Singapore, contributing to 13.6% or RM89.04 billion of Malaysia’s exports from January to August this year.

Oanda Corp senior market analyst for Asia Pacific Jeffrey Halley expects BNM to cut interest rates for the second time this year, especially after Malaysia’s PPI sunk 2.4% — a very bad print for the country.

A cut in the lending rate is not necessarily bad for the ringgit as this would spur on the Malaysian economy and potentially result in an uptick in domestic consumption.

“Malaysia can only mollify the trade war and slowdown effects to some extent as a smaller economy among some very big fish,” Halley told TMR.

“The best way to do that in the short to medium term is a combination of monetary and fiscal stimulus.”