Ringgit could hit 4.00 by year-end

Optimism in the oil market and rising FDI into Malaysia will help restore the ringgit’s strength hereon

by DASHVEENJIT KAUR/ pic by BLOOMBERG

HIGHER energy prices and inflow of funds will help the ringgit strengthen to the 4.00 level against the US dollar by end-2020, in tandem with the recovery in the global economy, according to analysts.

Despite the exchange rate being susceptible to volatility fuelled by the lingering Covid-19 pandemic, experts believe the local note is unlikely to trade above the 4.30-4.35 range against the greenback.

AxiCorp global chief market strategist Stephen Innes expects the ringgit to trade at the 4.20 level in July if oil prices hold and eventually test 4.00 against the greenback by the fourth quarter of 2020 (4Q20).

“I think it is going to be difficult to see the ringgit trading above the 4.30-4.35 zone if the current commodity market’s direction remains consistent,” he said.

As a commodity-linked currency, the ringgit has improved by 4.94% against the greenback on a year-to-date basis.

The ringgit closed steady at 4.283 against the US dollar yesterday after a brief setback on Monday due to S&P Global Ratings’ revised outlook on Malaysia to ‘Negative’ due to the weaker fiscal position amid a weaker economic climate and increased political uncertainty.

The ringgit rose against the Singapore dollar to 3.0676 from 3.0746, appreciated against the British pound to 5.2562 from 5.2788 and climbed against the Japanese yen to 3.9763 from 3.9933 on Monday.

The local currency also appreciated vis-a-vis the euro to 4.8047 from 4.8254 previously. Innes said what is needed now is for the US’ Covid-19 case count to drop. “This is so for oil to move higher. I really believe commodity prices will go much higher in 3Q given all the stimulus backing,” he added.

As some countries are experiencing resurgence in the virus infections, including the US which reported more than 44,000 new cases last Friday, most analysts expect the currency and equity markets to remain choppy.

Kenanga Research, in a note this week, stated that the optimism in the oil market and rising foreign direct investment (FDI) into Malaysia will help restore the ringgit’s strength hereon.

This is despite the expectation of a more risk-off environment over the next few weeks. “The short-term US dollar/ringgit technical analysis indicates a bearish dollar trend. A breakout below the support level of 4.278 could propel the pair towards another check at 4.266,” it stated.

Innes added that China’s industrial data released over the weekend was positive although Malaysia’s trade data came in weak.

“But that was expected, almost right on the market consensus. That data will only get better as supply chains reopen,” he said.

Innes thinks Malaysia is poised to attract US multinationals in China looking to relocate to other parts of Asia. “It’s interesting that a huge chunk of US medical supplies are manufactured in China and Malaysia would be an ideal destination,” he added.

Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid is also quite positive on the ringgit’s exchange rate outlook.

“While S&P has revised the sovereign rating outlook, the rating firm seems to be receptive to certain macroeconomic parameters such as robust external position and flexibility in monetary policy.

“So, it’s not really doom and gloom, but perhaps, more guidance on government strategy to reduce the budget gap when the economy recovers and should help the rating agencies to make their credit assessments on Malaysian govt financial standing,” he told The Malaysian Reserve.

Mohd Afzanizam expects the ringgit to continue to remain volatile as demand for safe-haven currencies such as the US dollar and yen would intermittently rise during periods of risk aversion.

“The wide interest-rate differentials between Overnight Policy Rates against various benchmark rates in advanced economies would mean there is an investment case to go long on the ringgit,” he added.

Fitch Solutions stated that the recovery in crude oil price will limit the downside for the ringgit.

It expects a still muted but bright outlook for the prices of other key export commodities to support the ringgit against further weakness.

“Our agribusiness team expects higher average palm oil prices in 2020 (RM2,300 per tonne) compared to 2019 (RM2,150 per tonne). This should provide support to Malaysia’s terms of trade over the coming months and put a floor under the ringgit,” it added.