by ASILA JALIL / pic by TMR FILE

RHB Research expects a temporary weakness in the US dollar against ringgit between RM4.11 and RM4.14 due to the steepening of the US Treasury curve.

Group chief economist and head of market research Dr Sailesh Jha said the US Treasury curve will steepen on the back of the market pricing out any federal funds rate (FRR) hikes in 2022 which will cause front-end yields to be on a softening bias.

He said the weakening of the greenback against ringgit will be driven by positive domestic fundamentals and policy-related news flows which will dominate sentiment towards ringgit.

Other factors include broad US dollar weakness against developed market currencies — such as euro — as the market in the near-term continues to price out US Federal Reserve (Fed) reduction of monetary accommodation and the increase in net foreign flows to the Malaysian bond market.

“In the Malaysian equity market, we expect net capital inflows to continue till at least the first week of October, which is partially a reflection of investors switching out from the Singapore equity market where net foreign flows are falling. In addition, net foreign flows to Malaysia’s bond market are up.

“We believe the current weakening of the US dollar is temporary and a U-turn will materialise in the fourth quarter of 2021 (4Q21). We maintain our end-4Q21 and end-1Q22 US dollar/ringgit forecast of RM4.20 and RM4.30, respectively,” he said in a note yesterday.

The firm also expects the US Dollar Index (DXY) to fall below 92. Its forecast for the index in the second half of the year (2H21) has been between 91 and 92, with 3Q21 averaging 92.61 levels.

In 4Q21, RHB Research foresees the DXY Index to average around 92 and 93.5 as the US Treasury curve flattens.

“US Treasury curve flattening will be driven by three main factors namely the Fed will announce its bond tapering programme at the November Federal Open Market Committee meeting for a lift off at end-2021 to early 2022, while the central bank will likely hike the FFR by 25 basis points (bps) at end-2022, followed by an additional 50bps hike in 2023.

“As a result, front-end rates will rise following a significant increase in US Treasury 10-year yields above 1.2%-1.4%,” said Jha.

He said the recent weakening of US economic data will abate while core personal consumption expenditures inflation will remain robust followed by improvement in the labour market conditions in 4Q21 which will also flatten the US Treasury curve.

“Some periods of flight to safety to the US dollar will arise as geopolitical risks related to Afghanistan continue, continued domestic regulatory reforms in China impinge on economic activity in Asia ex-Japan’s largest economy and Covid-19 new variant risks remain,” he added.

The research firm expects the Bank Negara Malaysia’s (BNM) Monetary Policy Committee (MPC) to maintain the Overnight Policy Rate at the current level and announce a neutral policy stance in its upcoming meeting this week.

BNM has maintained the benchmark lending rate at 1.75% since July last year. The MPC will meet tomorrow.

Prior to this, The Malaysian Reserve reported that ringgit is likely to extend its positive momentum for the short term as the investors favour the more stable political environment in the country coupled with the improving Covid-19 health management.

Malacca Securities Sdn Bhd head of research Loui Low said the two factors have boosted the local currency against the US dollar and are expected to continue supporting the ringgit in the short term.