Summary

• We are turning mildly positive on ringgit after a recent rebound from RM4.26/US$ to RM4.19/US$ over a three-day period. We now see ringgit appreciation bias to be sustained by a confluence of domestic and external factors.

Backdrop

• Since Jan-17, US$ has depreciated by 11.2% (DXY as proxy), reversing the uptrend that was seen after Trump won the US election in Nov-16. The US$ weakness was mainly attributed to concerns surrounding the execution of Trump’s pro-growth policies coupled with Draghi’s optimism on inflation that bolstered expectations on ECB QE tapering.

• Initially, ringgit had not risen correspondingly to the US$ weakness. Domestically, BNM’s FX measures led to an abrupt reversal of bond flows. Other factors that dampened investor sentiment towards ringgit assets include unstable commodity prices and reduction of Malaysia’s weightage in global benchmark indices.

• In 2Q17, ringgit staged a mild rebound in the absence of government bond maturing which reduced the outflow pressure. In addition, strong export performance helped in generating higher export proceeds conversion (May and June: +USD2.2bn; Mar and Apr: -USD0.7bn), further aiding the recovery in ringgit.

Latest Trends

• Last week, ringgit accelerated its pace of appreciation due to a confluence of factors:

• Synchronized global growth and monetary policy: Given the more entrenched growth across the advanced economies, the ECB is set to announce its tapering plans in the fall, probably October, which may join the Fed in a potential unwinding of balance sheet. This has led to further weakness in US$.

• Firmer oil prices: Crude oil prices recently rose to US$54/bbl, the highest level in 3 months, boosted by increased refinery capacity after hurricane outage reinforced by further supply cut by Saudi.

• Low foreign holdings in upcoming maturities: Despite the sizeable government bond maturities in Sep-Oct (RM14bn and RM13.5bn respectively), foreign holdings of these bonds are already low (5.8% and 4.3% of total outstanding) as most outflows already occurred in 1Q17.

• Higher export proceeds conversion: We opine that export proceeds has surged recently riding on strong export growth and higher trade surplus (Jan-Jul 17: RM51.0bn; Jan-Jul 16: RM43.7bn). Consequently, BNM reserves have climbed back above US$100bn despite a stable US$ swap position at US$16.5bn as at Jul-17.

Our Call

• Given the above, we now expect ringgit to undergo a mild appreciation bias. Our ringgit forecast range is revised to RM4.10-4.25/US$ for the remainder of 2017 . We introduce our ringgit forecast of RM3.90-4.10/US$ for 2018 .
   
• Key downside risks to our forecast are (i) a hawkish Fed which would keep to its scheduled rate hike and balance sheet unwinding (ii) war outbreak (geopolitical tensions).

Source: Hong Leong Investment Bank Research - 11 Sept 2017