KUALA LUMPUR (July 5): The ringgit is expected to fare better in the fourth quarter of the year due to improving growth in China as well as in anticipation of a pause in the US Federal Reserve’s (Fed) rate hikes and strong recovery of the Malaysian economy.

The currency, which is currently hovering at the 4.40 level against the greenback, is expected to strengthen to 4.25 at year end, MIDF Research said.

“Fundamentally, the ringgit is in a good position as the domestic economy remains on an upbeat momentum and, as a net exporter of crude petroleum, liquefied natural gas and palm oil, Malaysia stands to benefit from the elevated global commodity prices,’’ it said in a research note.

Against the greenback, the ringgit on average is expected to weaken from 4.15 versus the US dollar last year to 4.28 in 2022.  

Despite its depreciation against the greenback, the ringgit performed better than other major currencies during the first five months of 2022.

The local unit gained 8.4% against the Japanese yen, rose 5.4% vis-a-vis the euro, strengthened 3% versus the Australian dollar and increased 1.7% against the British pound.

However, SPI Asset Management managing partner Stephen Innes opined that it would trade in the 4.45 range versus the US dollar this year before ending the year at 4.35.

Asked about the ringgit’s potential to move sub-4.20, Innes opined that the ringgit is not expected to strengthen beyond 4.20 against the dollar anytime soon as the greenback remains “the darling” in anticipation of an even faster pace of rate hikes by the US.

UOB Malaysia senior economist Julia Goh gave a weaker projection for the ringgit at 4.46 to the dollar by the end of the third quarter and 4.48 by the end of this year amid downside risks due to scepticism about China’s economic recovery, coupled with a weakening yuan.

It is no secret that the US dollar is considered a safe haven by investors as global economic fragility continues to grow due to many variables at play.

“The Fed will continue to tighten the discount rate as the inflation outlook remains strong in the US,” Juwai IQI Global chief economist Shan Saeed said.

‘’The Fed is expected to take rates to between 2.5% and 3.25% by year end. They remain hawkish for the second half of 2022.

"We expect the Fed to change course and commence quantitative easing next year as advanced economies can’t take the pressure of higher interest rates post Covid-19 situation,’’ he told Bernama.

At home, Bank Negara Malaysia (BNM) is expected to hike the overnight policy rate (OPR) to between 2.25% and 2.50% by year end, in line with market expectations. 

He reckoned that the central bank would have a structured approach to raising rates.

‘’In the last two years, BNM has navigated the Covid-19 challenges successfully by sagaciously using the monetary policy levers to bolster gross domestic product growth at the macro level.

‘’If we analyse the global central banks, 39 central banks have raised rates this year to tame inflation. The global economy is heading for a higher interest rate regime for the next two to three years,’’ he said.

On May 11, the central bank decided to raise the OPR by 25 basis points (bps) to 2.0% from a record low of 1.75% after global inflationary pressures increased sharply.

According to Innes, BNM does not need to over-deliver and follow the US’ move to aggressively increase interest rates in a move to tame inflation.

Maybank Investment Bank Bhd (Maybank IB) chief economist Suhaimi Ilias said a 100 bps hike in the OPR is likely in the next 12 months.

Maybank IB has revised upwards its inflation rate forecast for this year to 3.4% from 2.7% previously and increased the inflation rate projection for 2023 to 4.1% from 2.5%.

For the record, the US has increased its federal funds rate by 125 bps (50 bps in May and 75 bps in June), which was more aggressive than expected, triggering further worries that the US economy would fall into a recession.

This was especially as another 200 bps hike is expected in the second half of this year, according to MIDF Research.

Domestically, BNM's Monetary Policy Committee is currently having its fourth meeting for the year.