KUALA LUMPUR: There is room for the ringgit to strengthen against the greenback by the end of 2022 due to the domestic economic recovery and high commodity export prices, although further depreciation of the ringgit is expected in the short term, according to foreign exchange specialists and economists.
CIMB Group Holdings Bhd Head of Treasury and Markets Chu Kok Wei said the group’s house view was RM4.20 against the US dollar, for the end of 2022.
“Our end-of-year outlook for the ringgit is more robust. Aggressive rate hike expectations from the US Federal Reserve (Fed) carry the risk of a harder landing, leading to a possible significant economic slowdown in 18 to 24 months,” he told StarBiz.
“In the event of a soft landing, the global recovery should be more synchronized after the conflict in Ukraine and the easing of supply chain disruptions, while Malaysia’s economic recovery would also be stronger, hence the best prospects in ringgits.
“High commodity prices and current account surpluses would also be good for the ringgit,” Chu said.
Peter Chia, senior currency strategist at United Overseas Bank Research, said that despite the weakness of the ringgit, Malaysia’s fundamentals remain strong, with positive growth prospects this year supported by the transition to endemicity, the reopening of international borders and further normalization of domestic demand.
“Job and wage prospects have improved,” he noted.
Chia said the ringgit was facing a decline, alongside other Asian currencies, against the US dollar due to increasingly hawkish signals from the Fed.
“The Fed is expected to make a larger-than-usual rate hike of 50 basis points at its May meeting and may soon announce further details on its plans to reduce its balance sheet. Recent yuan weakness has maybe weighed in on the ringgit as well,” Chia told StarBiz.
MIDF Research economist Zafri Zulkeffeli said the research unit’s year-end target for the ringgit is RM4.15, up from an initial forecast of RM4.09, while the average rate for 2022 is RM4.25.
He noted that fundamentally, the ringgit has more room to strengthen due to the positive development of domestic demand amid the reopening of domestic economic activities, the recovery of the labor market and the pressure stable inflationary.
Zafri pointed out that the performance of the country’s foreign trade remains on an upward trend, particularly through manufacturing, agricultural and mining products.
“With high global commodity prices, Malaysia stands to benefit more, given that the country is a net exporter of palm oil, crude oil and liquefied natural gas,” he told StarBiz. .
MIDF Research predicts that Malaysia’s gross domestic product (GDP) growth for 2022 will reach 6%.
“Even the International Monetary Fund (IMF) expects the Malaysian economy to grow by 5.6% this year. By comparison, the IMF has revised global growth down by 1.3%, to 3.6% for 2022,” Zafri said.
He said the ringgit could depreciate further to RM4.40 against the US dollar, mainly due to the play of sentiment amid the Fed’s faster monetary policy tightening. “We view the current trend as a strengthening US dollar rather than a weakening ringgit.”
Chu also said the U.S. dollar could strengthen a little more from now on, mainly due to expectations of aggressive rate hikes from the Fed.
“Once the ups begin to occur over the next few months, perhaps in 50 basis point increments, we expect US dollar strength to normalize,” he said.
Chu added that while it is understandable that many Malaysians are looking at the US and Singaporean dollars, both of which are primarily driven by the political actions of the Fed and the Monetary Authority of Singapore (MAS), the performance of the ringgit is much more mixed” when we look at a broader basket of currencies.
He noted that since the beginning of the year, the euro has weakened against the ringgit from 4.72 to 4.66, alongside the decline of the pound sterling from 5.63 to 5.55 and the fall of the yen from 3.62 to 3.40.
“One of the economic challenges we face globally is the divergent speed of monetary normalization. The performance of individual currencies is likely to respond to specific national policies.
“As we focus on an increasingly belligerent Fed, we also suddenly have China’s central bank embarking on easier policy to support the economy in the face of the national challenges of Covid-19.
“The recent weakness of the ringgit also correlates to some extent with the weakness of the yuan,” Chu explained.
Meanwhile, Moody’s Analytics economist Denise Cheok said the ringgit is likely to depreciate against major currencies such as the US dollar in the near term.
“The Singapore dollar is also expected to strengthen against the ringgit due to the MAS monetary policy tightening to dampen imported inflation.
“However, high prices for commodities exported by Malaysia such as crude palm oil and crude oil could give the ringgit some strength,” she said.
Julia Goh, Senior Economist at UOB Research (Malaysia), also noted that a surge in global crude oil prices is a double-edged sword for Malaysia’s fiscal situation, as rising oil revenues are countered by rising oil prices. increase in fuel subsidies, while Malaysia’s heavy reliance on imports also dilutes the positive effects. ripple effect of rising commodity prices.
“In the first quarter of 2022, exports gained 22.2% (fourth quarter 2021: 29% growth) while imports grew by 25.2% (fourth quarter 2021: 29.6% growth).
“The rise in imports over exports resulted in a narrower trade surplus of RM65.1 billion (fourth quarter 2021: trade surplus of RM76.2 billion),” she said.
Meanwhile, MIDF Research stands by its forecast of a 25 basis point rate hike on the overnight rate (OPR) this year.
“We think the central bank is more concerned with the stability of economic growth than the trend of the ringgit, when it comes to monetary decision-making,” Zafri said.
Cheok also said the central bank would likely prioritize returning the economy to pre-pandemic levels over capital outflows and currency depreciation.
“Inflation in Malaysia remains relatively subdued compared to the rest of the region. We still expect Bank Negara to raise rates only in the third quarter of the year,” she said.
Chu expects the central bank to remain vigilant on financial market volatility.
“The flexible exchange rate is also a buffer mechanism for the economy to adjust to the endemic phase.
“We expect the OPR to be largely determined by national economic conditions and needs, rather than reacting to currency volatility,” he said.