KUALA LUMPUR (Dec 21): The US dollar to the ringgit exchange rate is expected to strengthen to 3.95 by the end of next year, according to Kenanga Research.
In a note to clients, the research house said the local currency appears to remain firm relative to the greenback due to a weakening dollar index following the US Federal Reserve's (Fed) stance to maintain its current policy on its bond purchase programme and interest rate policy until the end of next year and going into 2022.
“The huge stimulus and fiscal spending along with the general optimism about the Covid-19 vaccine roll-out would likewise support the ringgit,” Kenanga Research said.
Nevertheless, it pointed out that an unpredictable political climate may continue to weigh on the ringgit as evidenced by the fact that it had remained above the US dollar-to-ringgit peg level of 3.80 primarily since the revelation of the 1Malaysia Development Bhd (1MDB) scandal, which eventually toppled the Barisan Nasional (BN) government in the 2018 General Election.
“Efforts to realise the underlying value of the ringgit, shifting from the prolonged state of being undervalued to fairly valued, would require a multi-pronged strategy focussing on restoring investors’ confidence, strengthening economic fundamentals, long-term political stability, better governance as well as progressive and forward looking policies,” it added.
Kenanga Research noted that the ringgit and the Indonesian rupiah were the most undervalued currencies among the Asean-5 countries, while the Singapore dollar, Thai baht and Philippine peso had either been fairly valued or in some instances overvalued since 2010.
It added that despite Malaysia and Indonesia demonstrating higher average gross domestic product (GDP) growth over the past decade, the rupiah and ringgit had been underperforming against the Singapore dollar and Thai baht.
At the same time, Malaysia’s foreign exchange (forex) reserves had expanded 3.6 times since 2000, marking the smallest gain among the Asean-5 economies which averaged 5.3 times, Kenanga Research noted.
While a sustained and higher current account surplus has resulted in a stronger Singapore dollar and baht, this has not been the case for the ringgit, which has been relatively weak even though it recorded a sustained current account surplus over the last 20 years.
Furthermore, despite Malaysia’s lower and manageable government debt level against Singapore, the ringgit hugely underperformed against the Singapore dollar.
In its weekly ringgit outlook, the research house stated that the ringgit surged to a 29-month high last week on vaccine roll-out optimism, US stimulus hopes and a dovish Fed.
“A continued rebound in Brent crude oil prices which hit a level last seen prior to the start of the Covid-19 pandemic also boosted the local note.
“The ringgit is expected to strengthen this week, underpinned by continued weakening in the US dollar following mass Covid-19 vaccination campaigns led by the US and UK as well as developments in the US stimulus package,” Kenanga Research opined.
However, despite the bullish trend momentum being seen for the ringgit, Kenanga Research viewed that based on the exponential moving average (EMA) indicator, the local note is expected to depreciate by 0.13% to 4.045, highlighting a potential profit-taking sell-off for the local note.
“From a technical perspective, the US dollar is expected to see some upward momentum this week, with immediate resistance observed at the (R1) 4.053 level. On the other hand, a break below the (S1) 4.030 support level is needed to confirm the ringgit's extended bullish bias."