Ringgit Could Appreciate to RM3.90 to the Dollar?

As the greenback continues to weaken, Ringgit rose to 4.0472 on 16 Dec. 2020, its highest level since July 2018. This breached the year’s previous high of 4.0515 against the US dollar in January.

Source: https://www.xe.com/

The greenback is weak due to super-low interest rates in the U.S., but economists and currency strategists also attributed the Ringgit’s strength to the global economic recovery fuelled by the development of Covid-19 vaccine and strong crude oil prices.

The Covid-19 vaccine rollout would allow the reopening of the economy, which could stimulate global economic activities. This, in turn, would increase the demand for fuel. The Opec+ member countries’ decision to reduce oil production by 0.5 million barrels per day (mbpd) from 7.7. mbpd to 7.2 mbpd in 2021 should also support crude oil prices.

AxiCorp Financial Services Pte Ltd chief global market strategist Stephen Innes told The Malaysian Reserve that the Ringgit could appreciate to RM4 to the dollar, if Brent trades at US$60 per barrel (currently trading at US$50.70 per barrel, 15/12/2020). For the Ringgit to gain further, it may require domestic economic activity to rebound and a drop on interparty political tension. If this does happen, according to Innes, the Ringgit could rally to RM3.90 to the dollar soon. This is also predicated that the US dollar will continue to weaken.

“With the vaccine rollout, the ringgit also stands to gain from more exports heading west. Simultaneously, the thriving Malaysian travel industry should receive a huge bump in tourist activity once air travel lanes finally open up more freely,” he said.

Oanda Corp Asia-Pacific senior market analyst Jeffrey Halley pointed that the resumption of interstate travel in Malaysia will also boost domestic economic recovery, but its effectiveness depends entirely on containing the spread of Covid-19.

Bank Islam Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid told StarBiz that he anticipates that the overnight policy rate to remain unchanged at 1.75% next year. From an interest rate differential perspective, he said Malaysian assets would provide better yields and attract investors looking for higher returns.

However, from the Nominal Effective Exchange Rate (NEER), the ringgit may still hover below 100 points. In that sense, the Ringgit is weaker against certain currencies, namely the euro, South Korean won, Aussie dollar, Chinese yuan, Japanese yen and Singapore dollar. As of 16/12/2020, Malaysia is still one of the countries in Southeast Asia with the highest number of Covid cases recorded in the last 24 hours. The spike in Covid-19 cases is posing uncertainties to the recovery of the country’s economy.

Covid-19 cases by country (16 Dec 2020)

Source: https://www.csis.org/

A strengthening of currency is not particularly welcome by most exporters. Importers see it as a boon while imported inflation, if any, is further dampened. Outbound tourists see it as a benefit for travel in 2021. The real issue is whether we provide higher value through enhanced productivity or are we relying on short term measures to resolve long term problems.

Reference:

1.     Daljit Dhesi, Room for ringgit to appreciate, 14 Dec 2020, The Star

2.     Nur Hanani Azman, Ringgit set to gain on stronger oil prices, 14 Dec 2020, The Malaysian Reserve