KUALA LUMPUR: The ringgit should generally continue making a strong stride this year after strengthening against the US dollar and Singapore dollar in the past few weeks, economists say.
The local currency may even be traded at under 4.200 versus the greenback this year, buoyed by significant events and favourable economic conditions, according to an economist.
Year-to-date in the second quarter of 2024, the ringgit appreciated by about 0.5 per cent against the US dollar, setting it apart from other Asian currencies which had generally weakened.
Meanwhile, after hitting an all-time low of 3.57 against the Singapore dollar on Feb 21, the ringgit showed a strong recovery, trading at 3.49 on Thursday, a gain of about 3.4 per cent in under four months.
Several factors contribute to the positive outlook for the ringgit.
Economists pointed to Malaysia's strong economic fundamentals, including robust trade performance and expected gross domestic product (GDP) growth of around 4 to 4.8 per cent this year.
Additionally, the expected depreciation of the dollar in the next three to four months is giving a boost to major currencies in the emerging markets.
With the depreciating dollar, commodities prices will be heading north and thus bolstering the ringgit position.
"Overall, the ringgit should make a strong bounce back in the next quarter based on macroeconomic stability. Our call for ringgit is pragmatic and achievable in the current economic landscape," Juwai IQI chief economist Shan Saeed told Business Times.
"At the start of the year, Juwai IQI predicted that the ringgit is going to meander around 4.17 to 4.44 by year end. We still maintain the status quo on the ringgit call for 2024," Shan added.
Significant changes in global interest rates
Economists said the ringgit appreciation is linked to a series of policy rate reductions among central banks in advanced economies, particularly the US Federal Reserve (Fed).
Bank Muamalat Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said global central banks in the advanced economies such as Switzerland, Sweden, Canada and the European Union had reduced their policy rates by 25 basis points recently.
The trend is expected to continue, with the US potentially following suit in the third and fourth quarters of this year.
"As a result, the interest rate differentials between Malaysia and these developed economies are set to narrow, boosting the appeal of the ringgit. Our year end target for the US dollar-ringgit is at 4.65. We believe the Fed will cut their Fed Fund Rate in the 4Q2024, possibly around 25 and to 50 basis point (bps)," he said.
Ringgit rises against Singapore dollar amid positive domestic developments
Tradeview Capital Sdn Bhd vice president Tan Cheng Wen said the Singapore dollar, which usually moves in tandem with the US dollar, has seen fluctuations that are closely correlated with the US dollar's movements.
However, Tan said the recent rise in the ringgit from its all-time low might be attributed to the Malaysia's continued political stability, better than expected Q1 2024 GDP growth of 4.2 per cent and gradual roll-out and execution of the policies and plans announced by the government.
"For this trend to continue, our nation should continue to execute the many frameworks and blueprints such as the National Energy Transition Roadmap, the New Industrial Master Plan and Madani framework to boost our FDI," he said.
Central bank's pledge provide support for ringgit
A key support for the ringgit is Bank Negara Malaysia's adoption of a more proactive communication strategy, providing frequent updates and greater transparency about its monetary policies and economic outlook.
OCBC FX strategist Christopher Wong said this has helped to stabilise market expectations and reduce speculative pressures on the ringgit.
Meanwhile, Wong said initiatives by the government had encouraged government-linked companies and government-linked investment companies to repatriate foreign income, contributing to a more robust and stable currency market.
"Overall, it has been our long-standing view that the ringgit is likely to recover some lost grounds when yield differential dynamics improve as Fed gets closer to embarking on rate cut.
"FX is not a one-way trend and there will be some choppiness but in the broad scheme of things, we look for US dollar-ringgit and Singapore dollar-ringgit to inch lower towards 4.64 and 3.46 respectively for end-2024.
"This is premised on our house view that Fed will lower rates, China stabilisation story to gather more traction in the second half of 2024," he added.
MIDF Research said the ringgit rebounded and appreciated by 1.4 per cent month-on-month against the US dollar in May, closing at 4.707 by the end of the month, a rather encouraging turnaround from the declines in the previous months.
The firm expects an average of around 4.530 in 2024 (2023: 4.560) and a trend towards 4.430 by year-end (end-2023: 4.590).
However, several downside risks could limit the chances for ringgit to strengthen. This includes rising geopolitical tensions, delay in Fed's rate cuts and weaker growth in China.