The Malaysian ringgit may weaken to 4.10 against the US dollar by year-end if the global trade war were to escalate, said FXTM Global Head of Currency Strategy & Market Research, Jameel Ahmad.
He said the ringgit’s recent weakness was due to broad dollar strength as investor appetite towards the dollar continued to rise with expectations of higher US interest rates and the global trade war.
“The ringgit’s outlook hinges on global trade developments as the ringgit has surrendered almost all of its gains against the dollar this year,” he said during a media briefing today.
Ahmad pointed that if the US dollar had not recently bounced higher after hitting its lowest level in over 2.5 years, the ringgit would have been trending at around 3.80 to the US dollar.
“The next direction for the ringgit rests on how Beijing might act, or retaliate, to trade tariffs,” he said.
Ahmad did not think the People’s Bank of China (PBOC) or China’s central bank will devalue the yuan, as it would risk investors losing confidence in China, as happened in 2015.
“While the yuan has accelerated in weakness over recent weeks, this has highly unlikely been due to PBOC’s measures. The broad-based US dollar rally has been behind the Yuan’s weakness,” he explained.
Ahmad reiterated that it would be positive for emerging currencies if China does not react but allows fluctuations in external market forces.
“So far the ringgit has been the second-best performing Asian currency this year with only the Yen performing better than the ringgit,” Ahmad said.
He also emphasised that the ringgit has been able to advance against the Singapore dollar this year, although trade war concerns prevented further gains.
“However, an interest rate cut would risk weighing on sentiment for the ringgit, to the point where the currency weakens further,” he said.
Ahmad stressed that while there are challenging conditions in the external market, there is no reason for Bank Negara Malaysia (BNM) to reduce the rates at this juncture.
“BNM is likely to keep its interest rate policy unchanged at tomorrow’s Monetary Policy Meeting (MPC), as the economy is performing well and inflation is low,” he said.
The only reason to cut the rates, Ahmad said, is if global trade war tensions escalate.