Will You Be There at 5?

RHB Research has raised an alarming prediction for the Malaysian ringgit (reported by Rupinder Singh in Malaysian Reserve, 25 May 2023). It suggests that the currency may soar to RM5.00 against the US dollar in the medium-term. This forecast comes as the initial short-term target of 4.60 was surpassed on May 25, leading to a revised near-term target of 4.70, with a potential to decline to RM4.75.

RHB Research does not rule out the possibility of the USD-RM exchange rate hitting the significant milestone of 5.0 in the medium term. Several factors contribute to the relentless upward momentum of the USD-RM pair.

The negative carry on holding the ringgit is expected to increase as Bank Negara Malaysia falls behind the currency market and inflation curve (explained earlier in two blog articles “Why is the Ringgit Going South” on 24 May 2023 and “See You at 5” on 23 Sept 2022).

Additionally, market expectations of US Federal Reserve Bank (FED) Federal Funds Rate (FFR) hikes continue to rise, with a potential 25 basis points hike at the upcoming June 15 FOMC meeting, further impacting the currency.

Furthermore, dwindling domestic sentiment towards the ringgit is evident through low trading volumes in the domestic stock market and indications of capital flight to alternative assets platforms. The upcoming state-level elections may result in limited fiscal and structural reform announcements, posing further challenges for the Malaysian currency.

RHB Research’s USD-RM model indicates that unless significant changes in guidance from the Bank Negara Malaysia and substantial fiscal reforms are announced in the coming months, the USD-RM exchange rate could reach 4.762 by the third quarter of 2023. The research firm emphasises the crucial need for an interest rate defence of the ringgit by the central bank to stabilize the currency.

However, given the prevailing strong upward momentum, an overnight policy rate (OPR) of 3.75% with hawkish guidance may only be able to stabilise the currency within the range of 4.40-4.60.

The situation reflects a common dilemma observed in emerging markets, where policy responses often lag behind rising fiscal risks and declining domestic confidence in the currency. 

But what practical steps can BNM or the Government take? The people behind the slide could easily be identified – BNM has the data. The banks are also speculators - they do this under proprietary trading. So, impose a forex tax on these “fat” banks – just 0.01% on every transaction. Then have an “exit” tax for other speculators! Reduce the 225 basis point differential between OPR and the Fed Fund rate. Incentivise repatriation of export proceeds and divestment of overseas assets. Then set a medium to long-term strategy, targets and reforms for DDIs and FDIs to flow. Revamp also the MM2H soon.

We need immediate steps not some explanatory note that may not enhance confidence in the markets.

Reference:

RHB Research Warns: Malaysian ringgit could surge to RM5 against US dollar in medium-term, Rupinder Singh, The Malaysian Reserve, 25 May 2023