Ringgit gains on economic data, dollar weakness

Local currency closed stronger by some 230 points against the greenback at 4.14 yesterday, at a 7-month high


THE ringgit is expected to strengthen further against the US dollar in the near term as external factors such as improving economic data and dollar weakness help favour the local unit.

The ringgit closed stronger by some 230 points against the greenback at 4.14 yesterday, at a seven-month high.

Oanda Corp senior market analyst for Asia Pacific Jeffrey Halley said the ringgit is strengthening on a combination of general US dollar weakness and strong manufacturing Purchasing Managers’ Index data from China on Monday.

“The continuing evidence that China is recovering quickly has lifted hopes that exports to China from regional Asia will follow suit as China’s demand increases,” he told The Malaysian Reserve (TMR) yesterday.

Halley believes the dollar is in a longer-term downtrend with regional Asian currencies, being pro-cyclical, poised to benefit.

“That should lead to continuing ringgit strength in the months ahead. The ringgit should initially target the 4.05 regions over the next month with a move through 4.00 entirely possible over the fourth quarter,” he said.

Downside risks, Halley said, include Bank Negara Malaysia (BNM) taking advantage of the ringgit strength to further loosen its monetary policy stance.

“A resurgence of Covid-19 across China and the region or a failure of the vaccine trials to produce a workable result, would see the global recession prolonged,” he said of the risks.

AxiCorp Financial Services Pte Ltd chief global market strategist Stephen Innes appears to concur with Halley’s views.

“China’s economic data, a dovish US Federal Open Market Committee amid a huge drop-off in trade tensions suggest the ringgit can trade more robust to 4.12 before 4.10

“The most significant risk is if the US dollar strengthens on the back of higher US yields if the US Congress pushes through a bigger fiscal deal. I still think that will only delay the inevitable as any weakness in the ringgit will be faded,” he told TMR.

Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said such decline was in tandem with the US Federal Reserve’s (Fed) commitment to keep the benchmark rates or the Fed fund rate at a lower level for an extended period.

“Fed chairman Jerome Powell has recently indicated the 2% inflation target would be relaxed, which would mean the Fed would not raise rates immediately, even though inflation overshoot their target at some point in the future,” he told TMR.

Mohd Afzanizam also said Malaysia’s numbers of Covid-19 infections have by far been better than their regional counterparts, indicating the country is set to be reopened at a faster pace compared to the regional peers which would also mean the second half GDP could stage a recovery.

“The views on Overnight Policy Rate (OPR) cuts is very fluid. We have seen the one-year interestrate swap go up from 1.87% in early August to 1.9% presently.

“The 10-year Malaysian Government Securities was also higher, from 2.49% in early August to 2.62% at the moment,” he said.

Mohd Afzanizam added that there could be a change in how bond market players see the OPR evolve as the data print seems to suggest economic recovery is still intact with the recent export number grew positively by 3.1% during July against consensus estimates of -1.4%.

“It appears the view on ringgit is very constructive. The room for further appreciation is quite visible especially when the ringgit can be deemed as undervalued, with the average US dollar/ringgit rate since the country unpegged in July 2005 stood at 3.6255,” he said.

From a technical point of view, an analyst said the ringgit is likely to strengthen towards 4.10 or 4.00 psychological level against the dollar should the economy see a strong V-shape recovery.

The ringgit trajectory could reverse if GDP does not recover as anticipated and a second wave of Covid-19 infections lead to slowdown in economic activity.

“Next week’s Monetary Policy Committee meeting by BNM will decide the direction of the ringgit. Should the central bank stay put and change its tone towards a more hawkish stance into 2021, that may provide more strength for the ringgit,” he added.