Ringgit could fall to 4.38 by year-end, says OCBC Bank

by NURUL SUHAIDI / TMRgraphic

THERE is a tendency for the ringgit to fall towards 4.3800 against the greenback by year-end, according to OCBC Bank.

“OCBC Bank contends that the recent relative weakening in the ringgit vis-à-vis the US dollar should be seen in the context of the broad dollar strength, rather than a move pertaining to the ringgit,” OCBC Bank chief economist Selena Ling said in a statement today.

“There is a tendency for US dollar/ringgit to fall towards 4.3800 by year-end,” she noted.

She noted that the ringgit has recently rebounded against other currencies and is trading at levels near the peak strength since September 2020.

On a six-month horizon, the ringgit outperformed the rupee, baht, peso, Taiwanese dollar, Korean won and yen, but underperformed the yuan, rupiah and Singapore dollar.

While the worries about global recession escalated, the US dollar/ringgit is biased to the upside near-term on broad dollar strength and Bank Negara Malaysia (BNM) is likely lagging the US Federal Reserve in hiking rates in the relative magnitude of the move.

Next resistance for the US dollar/ringgit is not far away at the recent high of 4.4255, while support sits at 4.4000.

Additionally, Ling said that BNM may impose more rate hikes this year against the backdrop of rising global interest rates and domestic inflation pressure, according to OCBC Bank.

There will be at least one more 25 basis points (bps) hike from the central bank this year, which is likely to take place in the next meeting on Sept 8, according to her.

She said BNM then might pause in the last meeting of the year in November to assess the balance between inflation and recession risks before undertaking any action thereafter.

According to her, such relative monetary policy tightening will occur at a time when the economy is likely to recover, even though we might see a comparative slowdown in momentum due to global factors.

Previously, BNM made it clear what ultimately prompted the hikes which were sharp increases in inflationary pressures, which were driven by a rise in commodity prices, strained supply chains and strong demand conditions, especially in the US.

The central bank started its rate hike cycle in May when it raised its Overnight Policy Rate by 25bps and by another 25bps to 2.25% in July.

“Even though Malaysia had started the year on a strong footing, with the GDP growth clocking a higher-than-expected 5.0% year-on-year (YoY), the potential headwinds posed by a slowdown in the major economies are likely to present tougher times for the Malaysian economy,” Ling said.

In addition, the uptick in food prices has resulted in an uptick in the headline inflation rate to 2.8% YoY in May, compared to 2.3% in April, for instance.

“For the year as a whole, we see inflation averaging 2.9% YoY for Malaysia. While the food prices may remain a major driver of inflation, the upside is likely to remain capped if the government continues subsidy schemes.”

Not only that, the remaining GDP growth forecast for the remaining year, also looks less promising even though the forecast for the full-year GDP growth would naturally go up to account for the upside surprise in Q1.

“In net terms, we now see the full-year 2022 growth at 5.7% YoY, a measured uptick from 5.4% previously,” she noted.

In response, outside the US and several central banks are also not sitting still and are expected to adjust their monetary policy settings at a faster pace to reduce inflationary pressures.

Given the challenging first half of the year, the global growth forecasts have been downgraded multiple times for the year to date and the process may not have ended yet.

The World Bank and OECD have recently pared down their 2022 growth forecasts, and the International Monetary Fund has signalled it will do so in July as well.

“The European Central Bank for example has also signalled it will halt its corporate sector purchase programme purchases and embark on rate hikes to bring its policy rate out of negative territory as well this year,” she said.

“Should growth outturns in major export destinations such as China and the US slow down markedly from here, Malaysia’s growth trajectory will also be weighed down,” she said.

While Malaysia’s domestic demand has uplifted, she cautioned that the export component cannot be ignored, given the contribution to the overall economy, especially through the employment recovery.