Forex market looks to BNM policy rate for leads on ringgit

Ringgit should continue to strengthen through July and into August when BNM could cut interest rates after appraising the 1st run of data prints for 2H20

by SHAHEERA AZNAM SHAH/ pic by MUHD AMIN NAHARUL

THE ringgit is likely to appreciate this week if there is no surprise change in the interest-rate levels by Bank Negara Malaysia (BNM).

The central bank’s Monetary Policy Committee will meet tomorrow to decide on its Overnight Policy Rate (OPR) following a 50 basis-point reduction in May to 2%, the lowest in more than 10 years.

Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said despite the signs of recovery in several economic indications, the central bank is likely to keep the OPR at current level to gauge the impact of previous cuts on the economy.

“The US dollar/ringgit has been on a depreciating bias last week despite some good numbers coming out from the US as well as the rise in Purchasing Managers’ Indexes (PMIs) across the globe.

“There seems to be a divided view whether the BNM will cut the OPR this week. We believe BNM will stand still although there are tentative signs of economic recovery,” he said.

Mohd Afzanizam said the research house maintains its projection for the ringgit to hover around 4.25 against the US dollar.

June’s PMI has also surpassed the demarcation line of 50 points, suggesting businesses are feeling more upbeat following the gradual reopening of the economy, Mohd Afzanisam said.

However, he said there will be external risks to the ringgit’s exchange value as investors have been cautious and turning to safe-haven currencies due to the fear of a second wave of Covid-19 infections coupled with downward projections of major financial institutions.

“The spike in new infections in the US, which has led some states there to roll back their reopening, indicates the threats from the virus remain visible.

“Also, a series of downward revision on global economic forecasts by major institutions such as the International Monetary Fund and the World Bank indicates the downside risks cannot be totally discarded.

“This could lead to further demand for safe-haven currencies to dominate the foreign-exchange (forex) markets,” Mohd Afzanizam said.

AxiTrader Financial Services Pte Ltd global chief market strategist Stephen Innes said although the economic cost of the Movement Control Order was substantial, the fiscal and monetary response was equally extraordinary.

“As oil prices continue to recover gradually from here on, mind you, not without a few bumps in the road, there is continued policy support from BNM as Malaysia still has one of the highest real policy rates in the region at nearly 5%. There will be definite real yield appeal for the ringgit as investors continue to chase yield returns.

“So, the ringgit should continue to strengthen through July and into August when BNM could cut interest rates after appraising the first run of high-frequency data prints for the second half of the year (2H20) and the all-important second-quarter GDP report — out in August,” said Innes.

StashAway Malaysia Wong Wai Ken opined that the positive sentiment for the ringgit would be offset by the stalled oil price rally and the country’s political uncertainties.

“With the ringgit trading range-bound over the past month, we see limited upside for it to strengthen given the global recovery from the pandemic stalling and its effects on crude oil and political uncertainty.

“While we do believe the worst is over for the oil market with production cuts in the US and OPEC members, a US recovery is key in signalling a global recovery, which will limit the upside of oil prices,” he said.

Prime Minister Tan Sri Muhyiddin Yassin last month hinted at the possibility of a snap election to settle the political row over the Perikatan Nasional’s support in the Parliament.

“There is also political uncertainty as the possibility of snap polls increases and that would maintain the case for foreign investors to view Malaysia unfavourably until stability is reached,” Wong said.