This article first appeared in The Edge Financial Daily, on April 18, 2016.

KUALA LUMPUR: The comeback story of the ringgit is an interesting one — from one of the region’s worst performing currency last year to the best performing currency so far this year.

It feels as though the ringgit is currently on a roller-coaster ride — whips around a pitch-black dome, impossible to predict anything up ahead before it suddenly climbs into “space” that gives the riders a blast.

“We think the worst is over for the ringgit now,” said United Overseas Bank Malaysia (UOB) economist Julio Goh, nothing that the local currency has stayed below 4 to the US dollar for two weeks now.

“Net [US dollar] positioning has not reversed, suggesting potentially further dollar weakness on the horizon,” she added.

Wong Chee Seng, AmBank Group’s senior vice president for research and strategy, said the ringgit’s strengthening is likely to continue into the first half of the current quarter.

This, he said, will be aided by “supportive seasonality of Petronas’ dividend repatriation, additional transfer of GLC-related overseas asset sales, further foreign inflows into local bond markets and a stable yuan exchange rate.”

“This positive seasonality effects will, however, start to dilute as we move into the balance of the quarter,” he added.

Between March 31 last year and April 15 this year, the ringgit’s value had declined 5.16% against the US dollar. But year to date, the ringgit has appreciated 9.92% against the US currency.

Against its regional peers, the ringgit saw a similar trend, outperforming most of them year to date. It appreciated 5.05% against the Singapore dollar and 4.78% against the Indonesian rupiah. An exception was the yen, which appreciated against the ringgit by 0.28%.

The ringgit’s recovery this year has yet to erase the losses from the sharp decline last year. The local currency has underperformed almost all of its peers over the past one year, with only the Indian rupee and Thai baht being the notable exceptions.

Wong attributed the big change to the nature of the measurement.

“Measurement is always a relative game. Degree of gains or losses is always being subjected to the starting and ending points,” he said.

Goh said the ringgit’s strong performance this year reflects a correction from oversold levels last year.

“It is attributed to the rebound in oil prices, dollar weakness amid dovish Fed’s (US Federal Reserve Board) expectations, central banks of Europe and Japan to further loosen monetary policies, stable yuan and abating domestic headwinds that have aided improving market perception towards Malaysia.

“There is also greater sense of confidence that Malaysia’s fundamentals have proven resilient through the ringgit’s roller-coaster ride,” she added.

On the ringgit’s fair value, Goh said UOB’s estimates it to be between RM3.60 and RM3.70 against the greenback. But given the unpredictable nature of policy outcomes and volatile forex movements, the bank is inclined to maintain its mid-year target of RM4.05 and year-end target of RM4.10.

She said key events to watch include the risks when market prices in a Fed rate hike in June and how the dollar performs then.

“If there is a firm view that the dollar bulls have turned to bear, then there’s compelling reasons that the USD/RM could trend lower, or strengthen further from here.

“On the domestic end, markets are still cautious about the new Bank Negara Malaysia governor appointment,” she added.

Wong, on the other hand, feels that there is more room for the ringgit to strengthen.

“Valuation-wise, the real effective exchange rate of the ringgit is more than three standard deviations below its long-term average since 1999; this essentially gives some leeway for the currency to strengthen.

“Bank Negara is also unlikely to intervene to smooth the recent gains [by the ringgit] partly given its deep undervaluation and the need to rebuild foreign exchange reserve position,” he said.