Is ringgit capable of outshining greenback this year?

WITH the outlook for the US dollar expected to depreciate during the year, the ringgit is in a good position to remain on a positive trend in 2021.

The local currency is expected to hover around the 3.98-4.04 levels against the greenback on average although it may give up some of its gains during the year.

However, it could also weaken to around the 4.10-4.15 levels in the near term, according to AmBank Research chief economist Anthony Dass.

“The resurgence of another wave of infections around the world, including Malaysia, and the imposition of lockdown measures would weigh on the ringgit’s strength,” he suggested in a report entitled Ringgit Set to Shine This Year.

“Additionally, the relatively tighter monetary policy that is supporting the ringgit would lose some steam as Bank Negara Malaysia (BNM) is likely to reduce the OPR (overnight policy rate) by 25 basis points (bps) from the current 1.75% probably in the next MPC (monetary policy committee) meeting in March in a move to support the economy.”

Moreover, Dass expects the ringgit’s gains to be capped by inflation differentials.

In 2021, Malaysia’s inflation is likely to be higher than the US. Malaysia’s consumer price index (CPI) in 2021 is projected at 1.9%-2.1% and 2022 (2.1% -2.3%) while for the US, it is around 1.5%-1.7% and 1.9%-2.0% respectively.

This would reverse the advantage that Malaysia had in 2020, where the inflation was -1.1% year-on-year (yoy) against 1.5% yoy for the US.

“The need to maintain export competitiveness (inflation will make Malaysian goods more expensive, with all other things being equal) will likely put some depreciatory pressure on the ringgit, especially in the later part of 2021,” projected Dass.

Several factors that will determine the [value of the] currency going forward are political stability, the risk of a downgrade by foreign rating agencies as well as the review of Malaysia’s position in the World Bond Index.

Nonetheless, Dass opined that the drivers for the local currency (apart from the US dollar weakening) include:

  • Stable global crude oil prices: The price of Brent crude oil has been revised upwards from US$45-US$48/barrel to US$50-US$53/barrel for 2021. With the energy sector showing a pick-up in demand with a gradual roll-out of vaccines and government stimulus measures to support growth, the local currency can be boosted by as much as 0.2%.
  • An increase in domestic money supply: This will support the local currency by providing a booster of 0.06%. Growth in money supply would add pressure to potential inflation and raise expectation for interest rates to move up.
  • Yuan’s appreciation: Domestic economic conditions in China and a weak greenback are two major reasons for the Chinese yuan to be one of the most attractive currencies among the major economies. Recovery in China will benefit the region, including Malaysia, its largest trading partner.
  • Fiscal assistance: The stimulus packages unveiled by the US (US$1.9 tril) and European Union (US$2.2 tril) of late will add more liquidity into the global economy. Much of the liquidity is expected to flow into the emerging market where returns are promising. Malaysia is expected to benefit.
  • Malaysia-US monetary divergence: This may further widen the bonds yield spread between the two. The difference between the two countries’ 10-year government bond yield now stands at around 167 basis points, almost the widest on record. The yield spread may further widen in 2021, hence this will continue to encourage more capital inflows into Malaysia and further support the ringgit.
  • Still-large undervalued ringgit in real effective exchange rate (REER) terms: This will remain as an attractive valuation given it will provide support to the currency over the long term – Jan 27, 2021

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