Ringgit to rebound as US dollar weakens

The local unit will also rebound on the back of investors searching for higher-yielding assets

by NUR HANANI AZMAN / pic by BLOOMBERG

A WEAKER US dollar and higher crude oil prices are expected to further fuel the appreciation of the ringgit which hit a 29-month high of RM4.032 against the greenback yesterday.

MIDF Research economist Abdul Mui’zz Morhalim said the local unit will also rebound on the back of investors searching for higher-yielding assets given the low-interest rates in the advanced markets.

“The US dollar index, which measures the greenback performance against a basket of major currencies, declined to its lowest level since April 2018.

“The second factor that under- pins the stronger ringgit is the rise in the crude oil prices; the Brent crude oil prices have increased to US$51 (RM205.53) per barrel, the highest since March 2020,” he told The Malaysian Reserve (TMR).

Abdul Mui’zz said the change in investor appetite towards risky assets led to reduced demand for the US dollar.

One of the key factors that has led to the change in market sentiment over the past month is the progress in the Covid-19 vaccine development.

With the approval of the vaccines by health authorities, the vaccine administration has already started in the UK and the US, and soon in other countries, he added.

Oanda Corp Asia-Pacific senior market analyst Jeffrey Halley said the US Federal Reserve’s (Fed) decision to maintain interest rate, while signalling a continuation of easing monetary policy further depreciate the dollar that helped lift other currencies across the region yesterday.

“In the broader picture, Malaysia is a part of a broader cyclical recovery play, of which I expect Asean countries to outperform in 2021.

That will be supportive of the ringgit, as will its yield carry advantage over the US interest rates.

“I expect the dollar to remain weak for all of 2021, and with Asian economies outperforming, the ringgit appreciation will continue,” he told TMR.

Halley expects the ringgit to strengthen to 4.00 before the end of the year, rallying to an initial target of 3.85 in the early part of the first quarter of 2021.

Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid thinks there could be profit-taking activities and market correction along the way that could cause depreciation of the local unit. However, he added that the trend for ringgit is expected to be quite constructive going forward.

“We forecast the Fed to keep the federal fund rate lower for longer during the Federal Open Market Committee’s (FOMC) meeting (which was held on Dec 15-16). “The Fed has also revised their economic projection for next year with GDP likely to grow to 4.2% from an estimated 2.4% contraction in 2020,” he told TMR.

Mohd Afzanizam believes it’s the combination of weak US dollar and optimism over the economic outlook next year that resulted in stronger ringgit.

AmInvestment Bank Bhd chief economist Dr Anthony Dass said the ringgit gained 1.3% year-to- date (YTD) against the US dollar partly due to dollar weakness from Covid-19-induced slowdown and a Democrat president coming into office.

“Domestic noises, in particular Budget 2021, cleared at the committee level bode well for the ringgit. Focus will now be on steering the economic recovery. Hence, the ringgit is expected to hover around 4.04 levels in the short term,” he told TMR.

AxiCorp Financial Services Pte Ltd chief global market strategist Stephen Innes said the FOMC adjusted their forward guidance to ensure investors of the US bond yields will be held in check by future quantitative easing policy adjustments that will weaken the US dollar.

At the same time, he said the policy supports both pro-reflation trades that should push oil and other commodity prices higher.

“The weaker US dollar should also open the door for more equity inflows into the Malaysian market. So, to suggest all the stars are aligning for the ringgit might be an understatement.

“I think the best to come for the ringgit will be in 2021, so I expect further sustainable gains for all the reasons from above,” he told TMR.


Read our earlier report

Ringgit set to gain on stronger oil prices