by SHAHEERA AZNAM SHAH / pic by TMR FILE
THE increasing number of Covid-19 cases coupled with the anticipation the central bank could reduce the Overnight Policy Rate (OPR) to support economic activity could put pressure on the ringgit in the near term.
Bank Islam Malaysia Bhd economist Adam Mohamed Rahim said spread of the Delta variant in Asia will keep the local currency within the range of RM4.15 to RM4.17 against the US dollar.
“We continue to expect the ringgit to be under pressure as the latest movement restriction for certain parts of Selangor and Kuala Lumpur will see some manufacturing companies not being able to operate,” he told The Malaysian Reserve.
Bank Negara Malaysia’s Monetary Policy Committee (MPC) is expected to meet on Thursday for its fourth meeting for the year to review the country’s OPR which has not been adjusted after it was reduced by 25 basis points to 1.75% in July last year.
The ringgit saw a slight weekly depreciation of about 0.14% last week against the greenback to reach 4.1625 last Friday.
The reduced risk appetite among currency traders and the extension of lockdown in Malaysia due to the new Covid-19 infections caused the ringgit to depreciate by 0.1% and ended last week at 4.163.
Adam said the central bank will likely keep the OPR at the current level, adding that any increase in OPR will be seen as “premature” due to the surge in inflation being partly contributed by the low base nature and with much of the increase coming from energy prices.
“The country is still in the middle of recovery with current cases staying above 5,000 per day, so the current OPR of 1.75% is deemed appropriate at this juncture to support the economy.
“We reckon the aim to vaccinate 80% of Malaysia’s population by year-end is possible. Once this goal is reached, a full reopening of the social and economic sectors is something that can be reasonably expected,” he said.
Kenanga Investment Bank Bhd said the ringgit could remain subdued this week and is expected to hover around the 4.16 level as the US dollar index could continue to trade above the 92 levels amid global risk-off market sentiment.
“Looking beyond the worsening Covid-19 situation on deck, the direction of the local currency could be influenced by the release of the Federal Open Market Committee’s minutes and Bank Negara Malaysia’s (BNM) MPC meeting outcome,” it said.,
The ringgit fell last week to a level last seen on Nov 4, 2020, due to increased demand for the US dollar amid rising concerns over the spread of the highly infectious Delta variant across the world, the research house said.
“The local note was also pressured by a weak June manufacturing Purchasing Managers’ Index reading of 39.9 and the announcement of the Enhanced Movement Control Order (EMCO) in the Klang Valley.
“According to our five-day EMA (exponential moving average) indicator, the ringgit is projected to reverse its weakness last week with a slight gain of 0.14% against the greenback to 4.157 this week,” the investment bank noted.
From a technical perspective, it added that the safe-haven US dollar may face some downward pressure this week, with immediate support observed at 4.152 level.
“Inversely, a break above the 4.168 resistance level is needed to confirm the continuation of the US dollar uptrend,” it said.
Meanwhile, for the local benchmark index, Adam said the FTSE Bursa Malaysia KLCI (FBM KLCI) could trade in a tight range of 1,530 points to 1,540 points as the latest EMCO in Selangor and Kuala Lumpur will see some manufacturing companies not being able to operate.
“The stock market is largely pricing in no change in the OPR and should Thursday’s meeting meet investors’ expectations, then the market shall not react excessively.
“However, if BNM decides to cut the OPR below the current 1.75%, a knee-jerk reaction could happen whereby sentiment for the FBM KLCI and ringgit will be dampened as a lower OPR signifies that the central bank requires a more accommodative stance to support the nation’s economy in the wake of the current pandemic,” he said.