Ringgit outlook is mixed amid fresh MCO, dollar strength

by S BIRRUNTHA / pic by TMR FILE

THE ringgit is expected to show a mixed outlook as local Covid-19 cases surge leading to the reimplementation of Movement Control Order (MCO) in the country beginning tomorrow.

Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam said the immediate outlook on ringgit is quite mixed as the resurgence of Covid-19 sees the movement restriction in the Federal Territories and five states.

Putrajaya’s move comes as the UK government instituted a lockdown while Japan has announced a state of emergency.

He added that the rollout of vaccines should indeed be able to curb the pandemic spread perhaps in the second half of the year (2H21).

Mohd Afzanizam also said the US dollar index has gone up to more than 90 points, suggesting a risk-off mode may remerge.

“The latest US non-farm payrolls for December which fell by 140,000 was also taken by surprise, implying there is always a speed bump along the road to economic recovery.

“The prevailing domestic political landscape would also weigh on investor sentiment. Therefore, the ringgit/US dollar should stay cautious this week,” he said.

He added that the incoming President Joe Biden would have more leeway to prescribe a larger economic stimulus going forward.

Meanwhile, FXTM market analyst Han Tan said the ringgit could make another attempt to break below the psychologically important 4.00 level, provided the risk-on sentiment remains intact.

“However, should the dollar extend its rebound or if domestic political risks are ramped up, then US dollar/ringgit may mark a return to the 4.05 resistance level once more,” he stated in a recent note.

Tan added that the surge in oil prices following Saudi Arabia’s shocking supply cut announcement was unable to stem the ringgit’s declines as the greenback enjoyed some reprieve in the latter half of the week.

From a technical perspective, he said the pullback in US dollar/ringgit is deemed healthy as it brings the currency pair away from oversold levels. However, the overall downtrend for US dollar/ringgit remains intact.

“The greenback is expected to continue exploring more of its downside in the aftermath of the ‘blue wave’, which should allow Asian currencies to pursue multiyear highs,” he noted.

Now that the dust is settling on the 2020 US election cycle, Tan said investors are raising their expectations that the incoming Biden administration, along with the Democrat-controlled Congress, will roll out more fiscal stimulus for the US economy.

He emphasised that such a narrative is forming the basis for any investment decisions over the medium term, which is expected to translate into more upside for global stocks and more dollar weakness.

Tan said the currency market will be relying on US Federal Reserve (Fed) officials for any potential clues as to when they might ease back on their asset purchasing programme.

He added that such cues may prompt gyrations across broad asset classes, including the dollar and the wider foreign-exchange universe.

“Developments surrounding the global pandemic may continue having a major say in the global financial markets, especially if things take a significant turn for the worse,” he said.

AxiCorp Financial Services Pte Ltd chief global market strategist Stephen Innes said the inflationary rise in nominal yields in the US could be a precursor to a shift in the Fed policy, which is the primary key for the US dollar.

“The US dollar and the pivoting view on growth differentials that could see the US economy recover quicker than Europe in particular as Biden aggressively pushes vaccination efforts and will achieve herd immunity early,” said Innes.

He added that the market expects the broad US dollars momentum to extend even though the rising 10-year yield differential is leaning in US dollar favour.

Innes also said a stronger dollar could drag the ringgit despite higher oil prices.