Budget, China recovery catalysts for ringgit

PETALING JAYA: A market friendly Budget 2024 and improvement in China’s economy are expected to boost the ringgit, and it could be even more pronounced if inflation in the United States settles down.

SPI Asset Management managing director Stephen Innes expects the US dollar to weaken in the final quarter of this year (4Q), attributing this to the delayed impact of interest rate increases on the US economy.

The Federal Reserve (Fed) has raised its benchmark rate 11 times in an effort to cool inflation, putting the Fed fund rate range between 5.25% and 5.5%.

He believes these rate hikes are working their way through the real economy over time, and as a result, the pressure on bond yields is expected to decrease.

“The ‘stars’ must align on the United States and China sides of the equation for the ringgit to return to form,” he said in a reply to StarBiz.

For the ringgit to be in favour, Innes believes it requires much better economic growth in China, in addition to a soft landing in the United States with easing inflation metrics, but growth must still hold up.

“Any deviation from that narrow path could see the ringgit struggle, especially if the Fed holds rates,” he added.

He believes the Fed will either raise rates in the first half of 2024 or may be compelled to increase rates in November due to the impact of rising oil prices.

He said, typically, the ringgit would benefit significantly from higher oil prices, but not when the hawkish Fed and other central banks are on an inflation watch.

“If our call on weaker US data in 4Q is correct, which eases pressure on US rates, and China stabilises, we think the US dollar and ringgit pair could trade towards 4.50 by year-end,” he forecast.

Innes said the broader currency market rally would be shallow unless one of the challenger currencies, like the euro or Chinese yuan, start to perform better on improving local growth signals.

However, he expects the US dollar to likely remain strong over the short term, given the recent US consumer price index (CPI) data suggesting the “higher for longer’ Fed policy would be ingrained in stone for a while longer.

The US CPI for August 2023 rose by 0.6% compared to the previous month. Additionally, it showed a year-on-year (y-o-y) increase of 3.7% compared to August of the previous year.

However, excluding volatile food and energy, the core CPI increased 0.3% month-on-month and 4.3% y-o-y.

The dollar index, which tracks the currency against a basket of rival currencies, was up 0.19% to 104.79.

Bank Islam Malaysia Bhd chief economist Firdaos Rosli pointed out that year-to-date, the ringgit had weakened by almost 6% against the greenback.

“One of the many things could have been attributable to the measures taken by the Fed in terms of its monetary tightening campaign which started in March last year,” he said.

He believes the foreign-exchange market’s reaction to the ringgit has been subdued because many anticipate the US central bank will keep interest rates unchanged soon, with the possibility of considering a final rate hike in upcoming meetings in November or December.

“This is taking into account that the current inflation reading is still higher than the desired long-term target,” Firdaos added.

However, he believes the rate hike won’t be as aggressive as before, which could offer some breathing space for the ringgit.

Furthermore, he anticipates the local currency to see a recovery once the Fed begins to change its policy stance next year, as indicated by July’s Summary of Economic Projections.

Firdaos said there will be a new update on the federal funds rate forward-looking numbers soon, and the direction of the ringgit could be determined on that as well.

“This is important, considering it will affect the dollar index, which we foresee could influence the ringgit trajectory as both have a high correlation of around 90%,” he said.