Malaysia ringgit is short-term weak against greenback before regaining strength

THE short-term outlook (three to six months) for the ringgit has weakened significantly in view of the third wave of COVID-19 infections as well as the fiscal and monetary loosening that is required to support the economy in light of the outbreak.

This has prompted Fitch Solutions Country Risk & Industry Research to revise downward its 2021 average exchange rate forecast to RM4.15/US$ from RM4.05/US$ previously, and its 2022 average forecast to RM4.10/US$ from RM4.05/US$ previously.

“Since our Jan 5 update, the ringgit has weakened relatively quickly with further bearish technical signalling a weakening trend is in place, slipping by 2.7% against the greenback to trade at RM4.11/US$ on March 16 from RM4.01/US$ on Jan 5, leaving the year-to-date average at RM4.05/US$,” observed the research house.

“From a technical perspective, the ringgit appears to have settled into a downtrend having breached both the 50- and 100-day moving averages suggesting more weakness over the coming months.”

As for its long term outlook (six to 24 moths), Fitch Solutions expects the ringgit to benefit from a weakening bias in the greenback to trade slightly stronger than the mid-point of its long-term trading range between RM3.80/US$ and RM4.50/US$.

“That said, we have revised our 2022 average ringgit forecast to RM4.10/US$ from RM4.05/US$ previously to account for the ringgit’s likely weaker position in 2021,” justified Fitch Solutions.

“Medium-term prospects for the US dollar remains bearish in our view due to loose fiscal and monetary policy, and a renewed risk appetite as the global economic recovery becomes more synchronised.”

By contrast, the research house expects monetary policy at the very least to be tightened in Malaysia sooner than in the US with an expectation a 25 basis points (bps) hike in 2022.

Moreover, Fitch Solutions’ view for a slight strengthening of the ringgit is also supported by the large extent to which the unit has been undervalued in real effective exchange rate (REER) terms with the spot REER remaining 8.6% below its 10-year moving average as of January.

“An undervalued currency in REER terms helps to support exports and discourage imports which will provide some support for the ringgit’s strength over the coming quarters,” opined Fitch Solutions.

Finally, oil prices are likely to continue to remain on a recovering footing vis-à-vis the low prices seen in 2020 as a result of falling demand caused by the global pandemic.

The research house now expects Brent crude prices to average US$64.00/barrel and US$63.00/barrel in 2021 and 2022 respectively from US$58.00/barrel and US$56.00/barrel previously. This compares to a full year average of US$43.20/barrel in 2020.

“The ringgit has generally been correlated with movements in Brent crude prices and higher oil prices provides support for a stronger ringgit in the longer-term after short-term disruptions caused by the third COVID-19 wave dissipate,” added Fitch Solutions. – March 23, 2021


Subscribe and get top news delivered to your Inbox everyday for FREE