Thursday 28 Mar 2024
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KUALA LUMPUR (Dec 6): Fitch Solutions Country Risk and Industry Research on Monday (Dec 6) retained its forecast of the average exchange rate of the ringgit at RM4.20 to the US dollar in 2022 and 2023.

“The short-term outlook for the ringgit remains weak due to bearish technical signals and uncertainty caused by the emergence of the Omicron variant,” the Fitch group unit said in a note.

It also said the long-term outlook for the ringgit had worsened slightly given the hawkish tilts in major central banks around the world, although a significant downside will be contained by the ringgit’s undervaluation in real effective exchange rate terms and stronger economic activity in 2022.

According to Fitch Solutions, since its last update in September 2021, the ringgit has weakened further in line with its view, slipping by 1.1% against the dollar to trade at RM4.22 to the greenback as of Dec 2 — from RM4.18 against the greenback on Sept 24.

This brings the year-to-date average to RM4.14 to the US dollar, which is just shy of its 2021 average forecast of RM4.15 to the greenback.

“While we expect the ringgit to continue losing ground to the US dollar in the first half of 2022 (1H22), we expect [US dollar] strength to wane in 2H22 and this should see the ringgit average around RM4.20 [against the US dollar] in 2022, a forecast which we maintain,” it said.

From a technical perspective, it said the ringgit had breached the key level of support at RM4.20 against the US dollar and traded above this level since Nov 24.

It said the ringgit weakened following the release of the November US Federal Reserve (Fed) meeting minutes, which showed that Federal Open Market Committee members were growing even more concerned about inflation and willing to tighten policy sooner if prices grew too quickly.

It also said the US dollar index broke through the key resistance level of 95 in November and had remained above that level since, pointing to a slightly bullish signal for the US dollar at least in 1H22.

Meanwhile, from a fundamental perspective, Fitch Solutions sees rough balance in both depreciatory and appreciatory factors that inform its average forecast of RM4.20 to the US dollar.

“In terms of depreciatory factors, monetary policy will dominate, whereby a more hawkish US Fed is likely to put more pressure on the ringgit over the coming months, although this will be offset to some degree from the likely monetary tightening by Bank Negara Malaysia (BNM),” it said.

Fitch Solutions expects the Fed to implement its first interest rate hike in 2022, followed by another one in 2023.

“However, any depreciatory pressure is likely to be mitigated as our base case is now for the BNM to hike its overnight policy rate by a total of 50bps (basis points) in 2022 in order to maintain its interest rate differential against the Fed and to build up policy buffers for future shocks,” it said.

It also noted that real interest rate differentials are still in favour of the ringgit as it expects average real interest rates of -0.3% for Malaysia in 2022 against -4.2% in the US.

In terms of appreciatory factors, it said after a challenging year, it forecast a strong economic recovery in 2022 of 5.5%, which will provide support to the ringgit, although this view may be at risk over the short term given the emergence of the Omicron variant of Covid-19.

However, it said the uncertainty stemming from the variant could potentially first trigger a flight to safe-haven assets and see the ringgit (alongside other emerging-market currencies) weaken against the greenback and, secondly, disrupt economies at both the domestic and regional levels and further weigh on the local note.

“That said, economic fundamentals in 2022 are still set to improve, in our view, as the much-higher vaccination rate of 78.4% is likely to see the economy remain resilient in the face of even the Omicron variant, which will help limit depreciatory pressure on the ringgit,” it said.

While oil prices have weakened sharply in recent trading, Fitch Solutions' oil and gas team expect relatively elevated prices, forecasting an average Brent crude oil price of US$72 (about RM304.13) per barrel in 2022 against an estimate of US$71 per barrel in 2021.

“Higher oil prices will help support the ringgit through the overall trade balance, which has posted some of the strongest surpluses in recent years, coming in at RM26.2 billion in October, the largest surplus since at least 1996,” it said.

Edited ByLam Jian Wyn
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