KUALA LUMPUR (April 7): The ringgit is expected to recover against the US dollar in the second half of this year (2H21), when external developments turn more positive, and HSBC Group expects the local note to reach RM4 against the greenback by year end.
Senior Asian foreign exchange (FX) strategist Joey Chew said the ringgit, which appeared to be underperforming against the US dollar in March, remains one of the most undervalued currencies in Asia.
She said Malaysia's strong underlying fundamentals will help support the ringgit's recovery.
Among the catalysts that will provide support to the ringgit are the country's strong trade balance, inflows of foreign bond investors and adequate foreign reserves, she said.
“And most recently, Malaysian bonds have been removed from the FTSE Russell Watch List of possible exclusion and retained in the World Government Bond Index (WGBI),” she noted.
“Overall, these good things have not really been reflected in the currency yet, not to mention that the currency remains one of the most undervalued currencies in Asia.
“All these good things are supportive of the eventual recovery [of the ringgit] once the external backdrop turns more positive. I think our forecast is somewhat towards the RM4 level against the US dollar,” she said.
Joey said HSBC's base case going forward is that the US dollar will lose steam later this year due to the inflation story, and this will help to boost many ASEAN currencies, such as the Singapore dollar, the ringgit and the Thai baht.
Within ASEAN, Joey said HSBC is most positive on the Singapore dollar because the country is likely to reach herd immunity by year end.
“Indeed, in HSBC's model, Singapore’s real effective exchange rate (REER) index has already broken into the new and higher range, starting this month,” she noted.
On the ringgit and Thai baht, she said both currencies underperformed a lot in March and are now expected to recover some lost ground in 2H21. The ringgit, she added, will likely stabilise first on positive local developments.
At the time of writing today, the ringgit was trading at 4.1295 against the greenback. Year to date (YTD), the local currency has weakened about 2.72% from RM4.02 at end-2020.
On the equity front, HSBC equity strategist for the ASEAN and frontier markets Devendra Joshi said HSBC is “neutral” on Malaysian equities, given their generally defensive nature and little volatility in terms of valuation.
It is defensive in terms of its composition, with defensive sectors such as consumers' staple, utility and healthcare making up a good bulk of the local bourse, he said. It is also defensive from the ownership perspective, with various government-owned institutional funds such as the Employees Provident Fund (EPF) and Khazanah Nasional Bhd also making up a good bulk of the local market.
“This means that Malaysia is a non-volatile kind of market. From our view, if the US dollar were to derail [from a rebound due to rising yields], there should be some other markets that benefit more than Malaysia,” he added.