Rate hike to come on the back of a stronger ringgit

KUALA LUMPUR (Nov 20): The expectation of an interest rate hike next year is likely to be on the back of a stronger ringgit, with some economists predicting it could breach 4.000 to the US dollar in the next 12 months.

The local currency has strengthened 7.4% year to date against the US dollar — the second best-performing currency in Southeast Asia after the baht which gained 8.4% in the same period according to Bloomberg data. The ringgit closed at a fresh one-year high of 4.1610 to the greenback last Friday.

* ‘Brace for rate hikes next year’

Barclays plc senior regional economist Rahul Bajoria is one of the few economists who predict the ringgit could hit the 4.000 to 3.950 mark, premised on stronger economic growth, international reserves and current account balances.

“We think the ringgit remains attractive and should continue to appreciate in the next 12 months. We like the currency based on [the country’s] strong economic growth, improving reserves and current account balances,” he told The Edge Financial Daily via email.

Deutsche Bank head of Asia macro strategy Sameer Goel pointed out that Malaysia’s balance of payments is sensitive to interest rate differentials, and it would be important to see the basis between global rates and those in Malaysia.

“We expect the same to narrow, as the US Federal Reserve is likely to hike rates in December and another three times in 2018. That said, the ringgit is cheap on the average of our valuation models, and so any likely fallout on the currency should be limited,” he explained.

MIDF Research chief economist Dr Kamaruddin Mohd Nor concurred, expecting the ringgit to appreciate gradually against the US dollar on the back of sustained positive macro conditions.

“Better commodity prices and positive fund flows will be impetus for a stronger ringgit at least in the near term,” he said.

RHB Research Institute Sdn Bhd chief Asean economist Peck Boon Soon noted that the rise in crude oil prices might help improve Malaysia’s trade surplus and support the ringgit.

Additionally, he said the central bank’s policy that requires exporters to convert 75% of their proceeds into ringgit would create demand for the local currency.

However, Peck believes that the expectation of an interest rate hike by Bank Negara Malaysia (BNM) has been factored into the recent appreciation of the ringgit. The ringgit touched a one-year high of 4.1745 against the US dollar last Wednesday.

“I don’t think the ringgit will strengthen much [after this]. Our house view is that it strengthened on the weakness of the US dollar because people were uncertain whether the US would raise [the] interest rate by the end of December as [the] inflation rate has remained quite subdued,” he told The Edge Financial Daily.

“People are also watching whether US President Donald Trump will push through his tax cut plan or not and so, that is probably holding back the strong US dollar. Towards the end of the year, you may see expectation building up again on the US interest rate hike, which may weaken the ringgit. We are expecting the ringgit to hit 4.22 against the US dollar at the end of this year,” Peck added.

Socio-Economic Research Centre executive director Lee Heng Guie is also of the view that a much expected hike in overnight policy rate is unlikely to push the ringgit and Malaysian bonds up significantly next year.

“I think a BNM rate rise is more or less factored into the ringgit and the local bond market. That’s because after the BNM hint of policy change on Nov 9, bond yield picked up immediately,” he said, expecting the ringgit to appreciate to the 4.000 level by end-2018.

This article first appeared in The Edge Financial Daily, on Nov 20, 2017.

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