PETALING JAYA: MIDF Research says the outlook for the ringgit will be negative going forward as risks surrounding the currency exacerbate.
In a research report released today, it said the decision of Norway’s sovereign wealth fund to reduce exposure to emerging markets, including Malaysia, is expected to result in a substantial outflow from the Malaysian bond market over time, putting pressure on the ringgit.
“In addition, the possible downgrade of the Malaysian bond market by FTSE Russell will continue to haunt the ringgit until September 2019, the deadline given,” it said.
If the downgrade takes place, Malaysia will be excluded from the World Government Bond Index for the first time since 2007.
While a trade deal between the US and China is expected to provide relief to the rest of the world, fears continue as the delicate trade talks could collapse. US President Donald Trump’s latest threat to raise tariffs on US$200 billion worth of Chinese goods to 25% from 10% effective this Friday has escalated trade tensions.
If the talks fail, it will further dampen global trade and investment activities including those of Malaysia, and eventually weigh on growth. Weak exports demand is likely to narrow Malaysia’s current account surplus, contributing to the ringgit weakness.
Bank Negara Malaysia’s overnight policy rate (OPR), cut by 25 basis points yesterday, may cause further decline in the ringgit as lower interest rates are deemed unattractive to foreign investments, reducing the demand for and relative value of the currency.
However, the research house said despite all the downside risks to the ringgit, a gradual pick-up in commodity prices particularly Brent crude oil, better fiscal position of the Malaysian government, higher investment and domestic consumption activities likely resulting from the OPR cut and steady economic growth would support the currency.
It has revised its year-end 2019 ringgit target to RM4.10 against the US dollar, a 2% decrease from its earlier projection of RM4.00.
The ringgit is currently trading at US$4.14 against the greenback.