FITCH Solutions has revised its average ringgit forecast for 2020 and 2021 to RM4.25 and RM4.15 against the US dollar respectively.
It expects the ringgit to give up some of its gains against the US dollar, over the short term (in three to six months), as the latter appears to be oversold.
“Since our last update published on June 26, the ringgit has continued its recovery on the back of persistent US dollar weakness, a still-low incidence of new Covid-19 cases and the reopening of the economy.
“It has strengthened 2.5% to trade at RM4.167 against the US dollar as of September 23 from RM4.275 per dollar. The broad rally since June has seen the year-to-date (YTD) average exchange rate strengthen slightly to RM4.236/USD, from MYR4.248/USD previously,” noted Fitch Solutions.
“We expect the ringgit to give up some of its gains in the short term against the US dollar as the greenback appears oversold and poised for a short-term rebound. In light of these factors, we have revised our 2020 average exchange rate forecast to RM4.25/USD, from RM4.30/USD previously.”
Ringgit stabilised with Economy Reopening
From a technical perspective, Fitch Solutions said the ringgit has bucked its expectations for the key support level at RM4.20/USD to hold and has remained below this level since Aug 5.
However, it did not expect the unit to remain consistently below this level over the short-term, given that from a technical perspective, the US dollar was poised for a near-term, intermediate rebound.
Furthermore, it said, rising risk aversion due to the resurgence of the Covid-19 outbreak in several places across both develop and emerging markets, and the likelihood of a disputed US Presidential election later this year year could see safe havens outperform at the expense of riskier assets such as emerging market currencies.
As for the ringgit, Fitch Solutions sees it ranging between RM4.05/USD and RM4.30/USD over the short-term.
That said, it expects oil prices to remain steady and given the correlation with the ringgit, oil prices would provide support against steep ringgit depreciation over the short-term.
“Our Oil & Gas Team continues to forecast average Brent Crude prices of US$44.00 per barrel of oil (/bbl) for 2020 and US$51.00/bbl for 2021, suggesting some limited upside from the YTD average price of US$42.61/bbl as of September 23.”
Additionally, relatively tighter monetary policy is likely to curb further depreciation in the ringgit over the remainder of 2020.
“Indeed, we now expect Bank Negara Malaysia to remain on hold and build policy buffers before hiking next year, following its decision to hold the benchmark Overnight Policy at 1.75% at its most recent Monetary Policy Committee meeting on September 10.”
Meanwhile, over the long-term (six to 24 months), a slight degree of appreciation in the ringgit, offset slightly by higher inflation in Malaysia compared to the United States, is seen on the back of tighter monetary policy and undervaluation.
“We expect ringgit to be on a slightly stronger footing and trade around the mid-point of its long-term trading range between RM3.80/USD and RM4.50/USD, over the long term,” the financial information services provider said.
Fitch Solutions added that it foresaw prospects for a stabilisation of the unit in 2021, in line with its view for the global economy to begin recovering in late fourth quarter of 2020.
“Also, medium-term prospects for the USD are more bearish in our view due to loose fiscal and monetary policy. Accordingly, we have revised our 2021 average ringgit forecast to RM4.15/USD, from RM4.20/USD previously.”
“The still-large extent of undervaluation of the ringgit in 2020 will also provide a cushion against deeper depreciation in 2021. The ringgit remains materially undervalued in real effective exchange rate (REER) terms, the spot REER came in 8.6% below the 10-year moving average in August, compared to 10.9% in May.
The ringgit will therefore remain attractive valuation-wise, providing support to the currency over the long term.
“We also expect the central bank to begin hiking rates later in 2021 by up to 50bps in order to continue building policy buffers and to keep inflation in check, which would make the ringgit more attractive from a yield perspective,” stated Fitch Solutions.
However, Fitch Solutions expects gains to be likely capped by inflation differentials, saying that inflation in Malaysia is likely to be higher than in the US over the course of 2020 and 2021.
“We forecast average year-on-year (y-o-y) inflation of 2.3% and 2.1% in 2021 and 2022, respectively, for Malaysia, and 1.5% and 2.0% year-on-year inflation respectively for the US.
“This would reverse the advantage that Malaysia had in 2020, for which we forecast inflation of -0.5% y-o-y, against 1.5% y-o-y for the US. The need to maintain export competitiveness (inflation will make Malaysian goods more expensive all other things equal) will likely put some depreciatory pressure on the ringgit, especially in 2021.” – Sept 29, 2020
Fitch Solutions cautioned, it saw down side risks to both its short- and long-term forecasts, especially given the signs of a resurgence of another wave of infections around the world, including Malaysia.
Malaysia has seen the number of new cases increase to dozens since mid-September. The re-imposition of lockdown measures in major economies, especially Malaysia would be a severe depreciation risk for the ringgit, it said. – Sept 29, 2020
