KUALA LUMPUR (Nov 6): MIDF Research said the ringgit is likely to appreciate towards the end of the year, on expectations that the Federal Reserve will stop raising interest rates, China is poised for a recovery, as well as the easing of the demand for the greenback as a safe-haven investment.
However, MIDF qualified that these projections are subjected to uncertainty about the Fed’s policy, the volatility of the US treasury yields, and the current geopolitical tensions in the Middle East.
In the note on Monday, the research house said it expects the ringgit to strengthen in the last quarter of 2023 (4Q2023), with the target price at RM4.30 to the US dollar, as the Fed nears the end of its rate hikes.
By assuming that the overnight policy rate (OPR) remains unchanged at 3% until 2024, MIDF expects that there will be no further widening of the federal funds rate-to-OPR gap, which combined with solid economic fundamentals such as resilient growth, low inflation and improved external trade, is supportive of the ringgit’s recovery.
MIDF has also projected Malaysia’s trade performance to be further enhanced amid China’s economic recovery, and the rise in electrical and electronic (E&E) exports.
Earlier, the Malaysian ringgit had seen a fluctuation by 1.4% month-over-month (mom), closing at RM4.764 due to the stronger greenback. The monthly average depreciation rate fell concurrently to RM4.74734.
According to MIDF, the reason the ringgit hit its lowest recorded daily close at RM4,794 in October 2023 was a consequence of the dollar strengthening, causing other currencies — including the ringgit — to depreciate, as the outflow of funds continued due to risk aversion .
The dollar has appreciated against most currencies, ending the month at 106.66 — an increase of 0.5% mom — and reaching its peak at 107.0 in early October 2023.
The ringgit perhaps gained upward momentum at the end of the month (October) against the greenback, which MIDF attributed to the weakening of the dollar, due to moderating inflation and no anticipation of a US Federal Reserve (Fed) rate hike.
“We opine the dollar to trade lower in the coming months, as we believe [that] the Fed already reached the end of its tightening cycle, following another pause in November 2023,” said MIDF.
Commenting on the other global economic phenomenon, the research house acknowledged that the financial market movements — such as the Israel-Palestine conflict and expectations on the US Fed’s future decisions — posed a greater influence on the ringgit’s performance, reflecting that any unprecedented circumstance on the international political structure may likely cause the ringgit to fluctuate.
Additionally, MIDF also pointed out that the ringgit may face unfavorable commodity prices, as the Brent crude oil price has dropped by 8.3% mom to US$87.41 per barrel (or by 4.2% mom on average to US$88.70 per barrel).