PETALING JAYA: With expectations fading quickly that the US Federal Reserve (Fed) will execute multiple rate cuts this year, all eyes are once again on the ringgit.
Recent data had indicated that inflation would remain sticky in the United States, underpinned by a strong job market and persistent consumer demand.
As economist at global credit insurer Coface, Nouri Chatillon, put it: “The last few miles to bring inflation back to target will probably be the most difficult.”
Many are wondering about the position of the ringgit in comparison with the greenback and a basket of other currencies should rate differentials fail to narrow by the end of the year.
Economist Prof Geoffrey Williams is calling for calm as nothing has changed with regard to the Malaysian currency.
Keeping to his prediction that the ringgit would hover around RM4.70 to the dollar this year, he said the current valuation of the former had to do with global factors including geopolitical issues in the Middle East coupled with signals from the Fed that interest rates would remain higher for longer.
“This is pushing money out of markets like Malaysia into safe-haven markets, especially the United States, where returns are higher.
“It is not reflecting underlying fundamentals in the Malaysian economy and is outside of the control of policymakers,” he told StarBiz.
On that note, Chatillon opined that Bank Negara – like its regional counterparts in Asean – calibrates its monetary policy to that of the Fed to avoid capital outflows.
“The ringgit came under strong downward pressure, prompting the central bank to leave interest rates unchanged for the fifth consecutive meeting in March,” he said.
Alluding to Bank Negara’s delicate balancing act, he said while currency stability is important, an interest rate low enough to support the economy is another consideration.
Hence, Chatillon is anticipating the central bank to keep rates unchanged until the next Fed rate cuts, although he added that the quantum of the Fed cuts is likely to be modest, offering only little room for monetary easing and suggesting that restrictive rate levels will persist.
HSBC Asean economist Yun Liu concurred with Chatillon that Bank Negara has largely maintained its “neutral” tone, observing that there has not been many reasons for it to adopt either a hawkish or dovish stance.
“This is because growth is still at a nascent stage of recovery and inflation remains largely benign.
“On the other hand, foreign exchange concerns continue to persist due to the prolonged strength of the dollar.
“Therefore, we expect Bank Negara to stay on hold in 2024,” she said.
Despite expectations of a much slower Federal Funds Rate (FFR) cuts than anticipated, MIDF Research expects the appetite for riskier assets to improve as the Fed moves to lower rates.
“We continue to foresee the ringgit and other regional currencies benefiting from the return of foreign fund flows into emerging markets, especially when the Fed slashes its interest rates.
“Nevertheless, adjusting to the significantly smaller degree of FFR cuts than initially expected and taking into account the effects of prolonged dollar strength, we foresee a smaller appreciation of the ringgit,” it said.
The research house is anticipating the ringgit to average relatively stronger at RM4.53 in 2024 and move towards RM4.43 by year-end.
Notably, should the Fed buck expectations and delay reducing rates in 2024, on top of prolonged tensions in the Middle East, MIDF Research agreed with Williams that the ringgit’s performance would not deviate significantly from its current level.
“In that scenario, we project the ringgit to average weaker at RM4.77 with the year-end exchange rate to be around RM4.74,” it said.
Meanwhile, the Japanese yen has grabbed attention early this week with its sudden appreciation against the dollar after weakening to cross 160 yen on Monday.
The yen had withered to its lowest against the greenback since 1990, despite the Bank of Japan (BoJ) having discarded the negative interest rates policy last month, with currency traders expectant of actions from Tokyo to beef up the note that has slipped more than 11% against the dollar this year.
Williams is of the view that all currencies are affected and the ringgit is more resilient due to Bank Negara’s effective market management.
He said the central bank is intervening in the best way by ensuring market liquidity and inflows of buyers for the ringgit.
“At present, Bank Negara should continue this policy until the situation develops further. The ringgit has probably reached a lower limit at the moment. So ringgit traders should not be unduly worried,” he added.
Executive director and economist at the Socio-Economic Research Centre Lee Heng Guie is also expecting the BoJ to maintain a gradual monetary tightening ahead.
“The central bank had indicated that it would not change its policy to directly influence the strength of the yen, but if the weak yen significantly affects inflation, the central bank would consider taking some sort of action,” he said.
