Ringgit set to gain on stronger oil prices

Higher prices for energy could see the ringgit appreciate to as low as RM4


THE ringgit is poised to strengthen further against the US dollar on higher oil prices as Brent crude rose above US$50 (RM202.57) per barrel for the first time last week since March.

AxiCorp Financial Services Pte Ltd chief global market strategist Stephen Innes said the higher prices for energy could see the ringgit appreciate to as low as RM4, basing his estimates on Brent trading at US$60 per barrel.

“The most I see ringgit gaining for oil is RM4. For the ringgit to gain further, it will be up to domestic economic activity rebound and a drop on interparty political tension.

“But if this does happen, the ringgit could rally to RM3.90 next year if the US dollar continues to weaken on an inflationary impulse,” he told The Malaysian Reserve (TMR).

Brent crude hit US$50 a barrel on Dec 10 for the first time in nine months on progress made on the development of a Covid-19 vaccine that could translate into a significant boost for economies globally next year. Brent crude oil traded at US$49.97 per barrel yesterday.

Innes said the accelerated oil price rally reflects an increasingly deep-seated recovery in China’s demand for industrial metals and growing optimism on a post-Covid pick-up in global oil demand, attributed to the emergency rollout of vaccines before the holiday season.

“With the vaccine rollout, the ringgit also stands to gain from more exports heading west. Simultaneously, the thriving Malaysian travel industry should receive a huge bump in tourist activity once air travel lanes finally open up more freely,” he said.

For 2021, Innes said the negative year-on-year base effect for oil markets will likely give way to an anticipated exuberance in the first quarter (1Q21).

“Still, with much getting priced into the reopen 2021 reflationary surge, any reflationary expression will probably vanish just as quickly in 2Q21. The broad recovery in risk assets and oil prices has affected not only market-based inflation expectations but also energy-sensitive sectors within asset classes like equities and credit,” he added.

Meanwhile, Oanda Corp Asia-Pacific senior market analyst Jeffrey Halley expects the local note to strengthen past RM4 against the greenback, with higher oil prices a supportive factor.

“As a cyclical market, the vaccine-led recovery in 2021 will be supportive of Malaysian assets. That will lead to further appreciation of the ringgit with the US dollar set to spend most of 2021 falling internationally,” he told TMR in an email reply.

Halley said the resource and banking sectors should lead the FTSE Bursa Malaysia Kuala Lumpur Composite Index higher into 2021 which would help uplift the ringgit further to RM3.85 against the US dollar in 1Q21.

He added that the resumption of interstate travel in Malaysia will be a positive factor for a domestic economic recovery, but its effectiveness depends entirely on containing the spread of Covid-19.

Halley further expects oil prices to continue moving higher now that Brent crude has breached US$50 a barrel.

“Having shrugged off the unexpected rise in US crude inventories last week, expectations of a global recovery, and a weaker US dollar will see oil prices continue to rally into early next year. I expect Brent crude to move higher to around US$55 a barrel in 1Q21,” he said.

Meanwhile, United Overseas Bank (M) Bhd senior economist Julia Goh said the bank’s baseline expectations remain that the broad US dollar weakness and China’s strong economic recovery will lead to Asian currencies trading higher, including the ringgit, once uncertainty passes.

“Expectations of a gradual recovery in crude oil prices amid global economic reflation will also help reinforce the ringgit.

“Overall, we maintain our view for the US dollar/ringgit to ease to RM4 by end 2Q21 and RM3.95 by end 4Q21,” she said in a note.

Read our earlier report


Ringgit has 4.00 mark in sight