PETALING JAYA: The ringgit is set to continue benefiting from investors selling the US dollar and this will provide Bank Negara the flexibility to reassess its monetary policy this year.
The ringgit’s appreciation against the world’s reserve currency since last October is poised to continue as investors unwind their positions out of the greenback in anticipation of a pivot in interest rate policy by the US Federal Reserve (Fed).
Currency analysts expect the move to work in favour of emerging market (EM) currencies.
“A weaker US dollar is expected to contribute to the appreciation of Asian currencies in 2024.
“The China yuan is expected to benefit initially due to policy stimulus while South Korea won is poised to lead the pack, buoyed by the upward semiconductor cycle.
“The improving tourism sector is also expected to support the Thai baht,” said Stephen Innes, managing partner at SPI Asset Management.
He added with the Fed taking a more dovish stance and hinting the end of its rate-increase cycle and possible cuts going forward, the yield differential between the US 10-year government bonds and Malaysian Government Securities had narrowed considerably.
StarPicks
Financial lifeline for underbanked micro-businesses
“If the Fed follows through with anything near what the market is pricing in – 150 basis points (bps) of cuts – the ringgit to US dollar rate could fall to 4.25,” he said.
While acknowledging the deceleration of the US and eurozone economies would pose challenges to overall Asian exports in 2024, Innes said certain products, including artificial intelligence or AI-related goods and semiconductors are likely to enjoy stronger demand and thus offset some of the challenges.
South Korea, Taiwan, and Malaysia are expected to gain from this trend.
The ringgit has strengthened by 4% in the past two months against the greenback, from 2023’s low of RM4.79 to end the year at RM4.589.
Like Innes, economists forecast the ringgit to trade between RM4.30 and RM4.50 this year.
Bank Muamalat Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid is “quite positive” on the ringgit as the Fed is expected to cut its federal funds rate (FFR) this year.
“We have seen the 10-year US Treasury yields falling quite significantly from around 5% in mid October to 3.84% presently.
“Similarly, the US Dollar Index has come down drastically from as high as 107 points in March 2023 to 101 points currently.
“Therefore, the ringgit is expected to gain strength in 2024,” he said.
Mohd Afzanizam expects the ringgit to end 2024 at RM4.50 against the US dollar.
To recap, in the latest Federal Open Market Committee meeting, a majority of Fed officials had expected rates to fall to 4.6% or lower by end-2024, down from the current range of 5.25% to 5.5%.
The FFR is expected to further decline in 2025 and 2026.
Such expectations had led to the US dollar losing steam and the US dollar index – a common indicator of US dollar strength – has declined to 101.38 now from 107 points in early October last year.
The US Dollar Index is a measure of the value of the US dollar relative to a basket of six foreign currencies.
In the event the rates are lowered by the Fed, it would narrow the differential between the FFR and Malaysia’s overnight policy rate (OPR), providing more support to the ringgit.
The OPR stands at 3%.
The ringgit has been one of the casualties of the United States’ aggressive monetary tightening to rein in the country’s decades-high inflation.
The sharp rise in the FFR, along with the monetary tightening in many other advanced economies including Singapore, had diluted the ringgit’s appeal as ringgit-denominated assets offered lower returns than dollar-denominated assets.
Since March 2022, the Fed has raised its FFR by 525 bps from the pandemic-low range of 0% to 0.25%.
As a result, the inflation rate in the United States had fallen to 3.1% in November 2023.
While it is still higher than the Fed’s 2% target, the rate had fallen significantly from the Covid-19 pandemic era peak of 9.1% in June 2022.
While domestic inflation is under better control, the steep rise in interest rates had caused the US economy to slow down.
The market consensus is calling for a slowing down of growth, perhaps a mild recession in 2024.
To avoid a more serious growth deceleration, the Fed is likely to step in to make borrowing costs cheaper and stimulate the economy.
A currency trader told StarBiz, that the price action in the ringgit/US dollar pair is suggesting that the currency market has already priced in the Fed rate cuts.
Meanwhile, HELP University economist Paolo Casadio said the ringgit would likely hit RM4.40 by end-2024 – a level rarely seen in the last three years.
The ringgit is also likely to appreciate against the euro, according to Casadio.
“All the EM currencies lost against the US dollar well beyond the increased interest rate differential.
“Geopolitical factors, together with a clearly overvalued stock market, had pushed the US dollar beyond the fundamentals. In 2024, I expect a reverse move in the dynamics of the US dollar, with strengthening of the EM currencies including the ringgit.
“It is more difficult to forecast if the ringgit will appreciate against the Singapore dollar,” he said.
According to Casadio, there are two main catalysts to ensure a firmer ringgit this year.
The two catalysts are the structurally low and under-control inflation as well as a possible rebound in investments that would further support the country’s gross domestic product.
“The indicators will support the competitiveness and the dynamics of the Malaysian economy, and this will be reflected in a stronger ringgit,” he added.
Meanwhile, Afzanizam said the anticipation of a cut in the FFR would be a key catalyst for the ringgit’s continued appreciation.“Malaysia’s financial assets are also deemed undervalued with price-to-earnings ratio (PER) for the FBM KLCI hovering at 15 times currently as compared to the average PER of 17 times.
“Therefore, this will incentivise foreign investors especially when the economic reforms agenda such as subsidies rationalisation and other mid to long-term policies will be implemented in 2024,” he said.
Among the mid to long-term policies highlighted by Afzanizam were the National Energy Transition Roadmap and the New Industrial Master Plan 2030.
While the outlook for the ringgit appeared to be good, Innes warned that the markets would not be without risks.
Among the factors are economic uncertainties, geopolitical tensions, and electoral outcomes.
They will pose potential challenges to the outlined projections and warrant careful monitoring in the dynamic landscape of emerging Asian markets this year, according to Afzanizam.