Ringgit's sharp appreciation underpinned by external factors — Analysts

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KUALA LUMPUR (Jan 10): The ringgit's sharp appreciation today is underpinned mostly by external factors, especially by the dovish stance taken by the US Federal Reserve (Fed) on interest rate policy, currency analysts said.

Besides the anticipation that the Fed would slow down its rate tightening cycle in 2019, other supporting factors include the firmer crude oil prices and the growing optimism over US-China trade talks.

FXTM research analyst Lukman Otunuga said dovish minutes from December’s Federal Open Market Committee (FOMC) meeting had boosted buying sentiment towards the local currency with the ringgit closing at 4.0950/1000 against the greenback today compared with yesterday’s close of 4.1130/1160.

“While the positive market mood remains encouraging for emerging market currencies such as the ringgit, geopolitical risk factors are seen creating headwinds down the road,” Otunuga told Bernama.

With global growth fears and political uncertainty in Washington weighing on investors, the ringgit, like many other emerging market currencies, remained in the crosshairs, he said.

“In regard to the technical picture, the US dollar/ringgit is seen challenging 4.088 if a weekly close below 4.100 is achieved,” Otunuga said.

Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid believes that the main driver is the Fed.

“The FOMC meeting's minutes released last night suggest that the Fed has become more dovish with regards to the prospect of higher interest rates this year.

“Even Fed Atlanta president Raphael Bostic was of the view that there could be one more rate hike this year, suggesting that the Fed has become gradually mindful of its tightening mode,” Mohd Afzanizam told Bernama.

“That gives support to emerging market currencies, including the ringgit, as market participants are more inclined towards risky assets,” he added.

He also noted that the mid-level discussion between the US and China on trade had been progressing very well, resulting in further optimism on the emerging market currencies.

Moody’s Investors Service, meanwhile, sees increased fiscal challenges in Malaysia with the abolishment of the Goods and Services Tax (GST) and introduction of the Sales and Services Tax (SST).

In a media webcast today, in conjunction with the release of Moody's report titled ‘Sovereigns – Asia Pacific 2019 Outlook', Sovereign Risk Group vice-president and senior analyst Anushka Shah said the GST abolishment in favour of a narrower SST would shrink the government's tax base.

Economic Affairs Minister Datuk Seri Mohamed Azmin Ali said while it could not be denied that the country had to wrestle with fiscal problems because of the inherited debts from the previous administration, the country’s financial system could be returned to the right track with the initiatives undertaken by the government.

“But at the same time, we have to be more prudent in our spending to ensure transparency and accountability.

“We also have to guarantee a principle of value for money as well as open bidding system,” Azmin told reporters at a high tea and social contribution presentation ceremony today.

He said the international rating agencies would maintain the country's good ratings after seeing the government's determination in trying to revive the economy.

To attract foreign investment into the country, there must be a good system and governance, Azmin said.

“That is why the Prime Minister himself is leading efforts to fight corruption in a big way and has introduced several initiatives to show that the Pakatan Harapan government is open and transparent in combating corruption. This will restore investors’ confidence in the country as an investment destination,” he added.