Research firm expects recovering oil prices to limit ringgit from depreciating

Business research firm Fitch Solutions believed the weakly recovering prices for crude oil will limit the Malaysian ringgit from depreciating further.

“We at Fitch Solutions have revised our 2020 and 2021 average exchange rate forecasts to RM4.3/USD and RM4.2/USD, respectively, from RM4.350/USD and RM4.250/USD previously.

“Over the short term, a recovery in commodity prices, especially crude oil, which has been buoyed by an uptick in demand and a renewed Opec+ production cut agreement, is likely to limit the extent of weakness in the ringgit driven by poor economic prospects as a result of Covid-19,” Fitch Solutions said in a report released today.

They also said the ringgit will average stronger in 2021 as the global economy will likely be on a stronger footing then.

Fitch Solutions said they expect Brent crude oil prices to now average US$40 per barrel, an increase from the US$33 per barrel previously, but significantly lower than Putrajaya’s assumption of US$63 per barrel in 2020.

While the forecast of US$40 per barrel still implies some downside risks, as the year-to-date average stands at US$42.24 per barrel as of June 24, Fitch Solutions said the extent of the negativity has been much reduced.

“This likely floor under crude oil prices is likely to support the ringgit over the coming months,” the report read.

Aside from crude oil, Fitch Solutions expected a slightly better outlook for the prices of other key export commodities to support the ringgit.

In particular, they expected higher than average palm oil prices in 2020 at RM2,300 per tonne compared to RM2,150 per tonne in 2019.

They also expected Bank Negara to undertake aggressive easing of the Overnight Policy Rate (OPR) to one percent in 2020, from the current rate of two percent.

“However, with more aggressive monetary easing being implemented by the world’s major central banks, including the US Federal Reserve, the ECB, and the Bank of England, which have all announced large asset purchase programmes, this will help to ensure that the yield advantage Malaysia has will not diminish too greatly,” the report read.

For the long-term outlook ranging between six to 24 months, Fitch Solutions said they expected the ringgit to continue trading in the weaker half of its long-term trading range, between RM3.80/USD and RM4.50/USD.

But they saw prospects for stabilisation in 2021, in line with their view that the global economy would begin recovering in the late fourth quarter of 2020.

Despite that, Fitch Solutions also warned that there may be heavy downside risks to their forecasts, especially if there is a second wave of Covid-19 infections serious enough to spark another round of lockdown measures in the world’s major economies or in Malaysia.

“With a sharp uptick of new cases in the US to more than 30,000 daily, due both to protests and re-openings across the country, this scenario is a special risk for the largest economy in the world, with severe consequences for the rest of the global economy.

“Meanwhile, China has seen new clusters emerge in May and June, found in both the border regions to the north and south, and also the capital Beijing, leading to lockdown measures in those areas being re-implemented.

“Any disruption to the tentative recoveries indicated by high-frequency data in June would put more pressure on Malaysia’s economy and further sap risk sentiment around the world, threatening the ringgit further,” the report said.

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