Ringgit to gain on improved economy, strong commodity prices

Despite positive catalysts to support ringgit value, the prospects of rate hikes by the Fed and Covid-19 resurgence will continue to extend risk to the local unit 

by NUR HANANI AZMAN  / Pic by BLOOMBERG

ECONOMISTS expect the ringgit to strengthen this year backed by a better growth outlook for the domestic economy, supported by a current account surplus and higher commodity prices. 

Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abd Rashid said despite positive catalysts to support the value of the ringgit, the prospects of rate hikes by the US Federal Reserve (Fed) and the resurgence of Covid-19 cases worldwide would continue to extend risk to the local unit. 

“The reopening of the economy and global recovery should help the Malaysian economy to gain firmer footing. A higher overnight policy rate could be on the cards in the second half of 2022 although this could be a very close call,” he told The Malaysian Reserve (TMR). 

Oanda Corp senior market analyst Jeffrey Halley expects the ringgit to weaken through January if US treasury yields continue to rise. 

He explained the ringgit is under pressure because US yields are rising and the Fed is expected to tighten quicker. 

“With the Bank Negara Malaysia still in dovish policy settings to support economic recovery, a narrowing interest rate differential will weigh on the currency. That said, there is no reason why rising oil and palm oil prices will not translate to stronger stock market performances of the companies in those sectors and ancillary sectors,” he said. 

Last week, the signals for the Fed suggested a quicker and more aggressive path to contain inflationary pressures in the US. As a result, the ringgit eased against the greenback in last week’s foreign exchange trade. 

The US dollar/ringgit (US dollar/MYR) opened the trading week at RM4.1658 and closed at RM4.206 while the FTSE Bursa Malaysia KLCI (FBM KLCI) edged lower to close the week at 1,543 point on the prospects of a more aggressive policy normalisation by the Fed. 

“In this scenario I expect the US dollar/MYR pair to rise through RM4.3. The local equity market is very much a value-centric market, like much of Asean and the Dow Jones for example. Rising inflationary expectations should see the FBM KLCI outperform in January. However, the rally in Brent crude and palm oil prices has had no discernible impact on the ringgit,” he told TMR. 

Rakuten Trade Sdn Bhd research VP Thong Pak Leng expects the ringgit to perform slightly better against the greenback in the midterm, probably around RM4.15, supported by stronger prices of commodities like crude palm oil and crude oil. 

“Malaysian equities rebounded due to bargain hunting on selected heavyweights such as glove, plantation and banking while some investors, looking for value, bought into small cap stocks. The FBM KLCI remains well supported above the 1,530 level, hence we expect accumulation of stocks to persist on dips. 

“For next week, we anticipate the index to remain trending sideways with immediate support at 1,530 while resistance at 1,570,” he told TMR. 

Rakuten Trade head of research Kenny Yee expects the local unit to benefit from expected inflow of funds but the uptrend may be impeded by the prospects of a rate hike in the US.

“We expect FBM KLCI to touch 1,700 in 2022. I think the current palm oil price and Brent crude could marginally extend support to a stronger ringgit and market as we believe prices for both to be volatile,” he told TMR. 

For 2022, MIDF Research VP and head of research Imran Yassin Md Yusof and its economist Abdul Mui’zz Morhalim forecast the ringgit to average stronger to RM4.09 to the dollar (average in 2021: RM4.14 per dollar). 

They also expect the local equity benchmark to perform better based on the baseline assumption scenario of the liquidity situation remaining sufficiently ample but with the monetary policy on a moderately tightening path. 

Any upsurge in Covid-19 cases could lead to the re-imposition of some containment measures but would not result in nationwide lockdowns due to the high level of vaccination rates. 

“The authorities in China would be proactive in handling its property market situation and pull out all the stops to avoid a systemic fallout thus limiting the risk of cross border contagion, and general election, if called, may not result in negative price action post-election. 

“As such, we foresee a situation whereby the local equities valuation would gravitate towards the middle of its historical range from the undervaluation we observed last year,” Imran Yassin told TMR. 

Empirically, the FBM KLCI traded normally at between 16 to 17 times current year earnings, Imran Yassin and Abdul Mui’zz stated, adding valuations would usually gravitate towards the middle of its historical range. 

Hence, they forecast the FBM KLCI to hit 1,700 points by end 2022 or PER22 of 16.5 times.