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KUALA LUMPUR: The ringgit remains undervalued versus regional peers as expressed through a trade-weighted average which suggests the fair value of the ringgit should be closer to 3.50-3.70, says OANDA forex trading company.

Its head of trading for Asia-Pacific Stephen Innes said on Monday that with absolutely no protest from Bank Negara about the stronger ringgit, the door is wide open to continued appreciation.

“And with strong exports, Belt and Road initiative increasing foreign direct investment, improving oil prices and a weaker US dollar complimented by a hawkish Bank Negara, markets could pivot to that direction,” he said in his outlook report.

To recap last Friday, the ringgit took its cue from the surging yuan to break through the 3.95 US$: ringgit and quickly moved sub 3.94 as investor piled into ringgit positions ahead of Thursday’s Monetary Policy Committee (MPC) meeting.

“But the move was as much about the Bank Negara’s impending shift to policy normalisation as it was about regional risk sentient that remains off the charts with Asian equities continuing the stellar start to 2018.

“Also, global demand suggests Malaysian exports will remain firm and therefore support  GDP.

“With rising oil prices adding to the positive domestic narrative, but also posing an upside threat of inflation, this suggests the market may be underestimating the potential of at least one additional rate hikes in 2018 and lending support to the ringgit.

“However in the build-up to the Bank Negara policy decision, the market will continue to trade sensitivity to the US dollar, but the bias will most likely be to cover risk on dips,” he added.

Making a case for a rate hike and stronger ringgit

Innes pointed out that it’s hard not remain firmly entrenched in the rate hike camp.

After last policy meeting, it became clear as day that Bank Negara was preparing to start normalising interest rates policy where during the November meeting there was a shift to a  hawkish bias based broadly on the back of an optimistic outlook for both domestic and external environments.

Last November, Bank Negara left interest rates unchanged not advocating to reverse a surprise reduction by 25bps to 3% in July 2016.

“So it should come as no surprise that the Bank Negara will remove the monetary accommodation driven by financial markets uncertainties around Brexit,” he said.

Innes said since Brexit risks have receded, global growth is surging, and the Malaysian economy is firing on all cylinders, it makes sense to get in front of inflation by gradually raising rate while allowing an undervalued ringgit to appreciate.

The recent rally in crude oil prices will drive up headline inflation while core inflation is expected to follow through with domestic demand accelerating.

In fact, Bank Negara could deliver a hawkish rate hike which would assuredly strengthen the Ringgit, and by extension, the stronger ringgit efficiently tighten monetary conditions while buttressing inflationary pressures.

With a January rate hike all but certain, the focus now shifts to forward guidance as a more hawkish retort from Bank Negara will increase expectations for a follow-up rate hike(s) in 2018 and the ringgit will soar.

“Bond markets have been consolidating with some investors pairing back short-dated tenors in case the Bank Negara delivers a hawkish surprise, as yields will increase correspondingly.

“But given that short-dated local currency denominated Malaysian government bonds are the ideal investment for foreign investors to express a bullish bias on the ringgit, we could expect demand to surge post policy decision and lend further support to the ringgit,” Innes said.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Stephen Innes

Stephen Innes

Head of Trading APAC at OANDA
Stephen has over 25 years of experience in the financial markets and currently based in Singapore as the Head of Trading Asia Pacific with OANDA. Stephen's market views focus on the movement of G-10 and ASEAN Currencies. His views appear in Bloomberg, CNBC.Reuters, New York Times WSJ and the Economist. His media appearances include Bloomberg TV & Radio, BBC International, Sky TV, Channel News Asia, ASTRO AWANI and BFM Malaysia. Stephen has an extensive trading experience in Spot and Forward FX, Currency and Interest Rate Futures, Money Market Derivatives and Precious Metals. Before joining OANDA, he worked with organisations like Nat West, Chemical Bank, Garvin Guy Butler, and Sumitomo Mitsui Banking Corporation. Stephen was born in Glasgow, Scotland, and holds a Degree in Economics from the University of Western Ontario.
Stephen Innes