PETALING JAYA: The ringgit has had a less-than-impressive run so far this year, yet an economist sees it appreciating to RM4.28 to the US dollar before the year is out.
If it pans out, it will be a significant recovery from the year’s low of about RM4.68 recorded on June 24.
This optimistic outlook was put forward by Bank Islam economist Firdaos Rosli despite, in his own admission, the lack of signs that the ringgit could strengthen in the immediate term.
Nonetheless, he qualified his comments with a warning that predicting the ringgit’s movement is “difficult due to the current volatile nature of the market”.
“There are many moving parts to the movement of currencies, which do not depend on the strength of the greenback alone. Many variables affecting the ringgit, unfortunately, are not within the government’s control,” he cautioned.
The ringgit has been on a rollercoaster ride over the past year. In June, it was labelled as the worst-performing currency in Asia, after the Japanese yen.
It started the year strongly, rebounding over 10% from a historic low of RM4.7465 on Nov 4, 2022, to RM4.2410 on Feb 2, 2023, amid anticipations of a more moderate US rate hike then.
However, the gravy train did not run for long.
The local note depreciated 5% in February as the US dollar recovered. The value of the greenback rose 2.7% that month as observers anticipated the restrictive US Federal Reserve’s (Fed) monetary policy would be extended for longer than expected.
“Subsequently, the ringgit continued to slide month-on-month as the interest rate and yield gaps widened,” Firdaos told FMT Business.
“The 10-year MGS/UST yield spread dropped into negative territory in the third week of February and has been trending so since the end of May.”
US, China factor
Firdaos agreed that the ringgit’s movements are largely driven by developments outside the country, particularly in the US and China.
The ringgit was influenced by the upward trajectory of the US dollar index, which continues to gain momentum on a weekly basis, he said.
“(This is largely) because investors have not entirely ruled out a rate hike by the Fed for the remainder of this year despite cooler-than-expected US CPI for July,” he said.
The US consumer price index (CPI) rose 3.2% (year-on-year) in July, lower than the expectations of most observers.
“Although we anticipate the local note to end the year at RM4.28, our current projection might require a relook amid the rapidly evolving conditions of the global economy in the coming months,” Firdaos said.
Bank Muamalat chief economist Afzanizam Rashid said China’s lacklustre economic data continues to hamper the ringgit’s recovery.
The world’s second largest economy reported a lower-than-expected GDP growth in Q2 2023.
The country’s unemployment rate for the 16-24 age group also reached a new peak of 21.3% in June, up from 20.8% in May.
Following these worrying indicators, China’s central bank cut the one-year medium-term financing facility rate (MTF) by 15 basis points to 2.5% on Aug 15.
“This is the second reduction for the year as China strives to maintain healthy growth as concerns deepen over their real estate markets,” Afzanizam said.
“Given the divergence in monetary policy between the US and China, whereby the former is expected to keep the interest rate on the high side, the US dollar looks more appealing compared to other assets.”
As of Aug 21, the US federal funds rate is at 5.5% versus China’s one-year MTF rate of 2.5%.
“This (divergence) resulted in higher demand for the US dollar. This is mainly the reason for the ringgit’s weakness against the US dollar,” he said.
Stable policies may help
While he highlighted that the ringgit is largely influenced by external factors, Firdaos acknowledged that the government could stabilise the currency by focusing on improving Malaysia’s economic fundamentals.
“The government can achieve this by implementing clear and concise policy directives,” he said.
“While we believe that the ringgit’s value is determined by the market, we do not rule out Bank Negara Malaysia’s (BNM) intervention in the forex market – following the drop in international reserves from April to June – as a factor.”
BNM announced on June 27 that it will intervene in the foreign exchange market to stem excessive volatility of the ringgit.
Furthermore, Firdaos said, the sustained net foreign funds inflow to Bursa Malaysia since mid-July may have contributed positively to the local currency.
“Lastly, there may also be positive sentiment from the market following the announcement of the Madani economy framework and the National Energy Transition Roadmap,” he added.