Fed rate hike won't crimp flow of funds into Malaysia

PETALING JAYA: The local market is expected to see continued inflows of foreign funds although the US Federal Reserve raised the benchmark interest rates by 25 basis points to a range of 1% to 1.25%.
Citing little implication for the emerging markets, RHB Research head of research Lim Chee Sing said the US dollar has actually weakened further because President Donald Trump has not been able to implement his policies as promised, such as the massive corporate tax cut and US$1 trillion (RM4.25 trillion) infrastructure spending.
He added that outflows of funds from the emerging markets would only become a risk when there is tempered global growth, but this is not the case at the moment as global growth stays intact.
“With growth prospects strengthening, we’ll always see emerging markets that will provide global investors better returns because of stronger underlying economic growth,” Lim told SunBiz.
There has been net foreign buying of RM10.4 billion in the local stock market year to date as well as a reversal in the fixed-income market with net buying of RM6.8 billion and RM10.1 billion in April and May respectively.
Lim said the market could see a strong US dollar later in anticipation of the tax reform implementation with the ringgit seen ending the year at 4.20 to 4.25 against the greenback before strengthening to around 4.00 by the end of 2018.
Hong Leong Investment Bank (HLIB) Research said the kick-start of the Fed’s balance sheet unwinding, though gradual, could be symbolic and could cause the US dollar to regain some strength into the second half of the year after the recent weakness due to disappointment over Trump policies.
“Coupled with the weakening bias in crude oil prices, we maintain our view that the ringgit could move back to our targeted range of RM4.30 to RM4.40/US$ in the second half of 2017,” it said, noting that bond outflows may resurface in the second half given the series of government bond maturity from August onwards.
Nonetheless, Kenanga Research noted that the stabilisation of financial flows to Malaysia, with renewed global interest in the local bond and equity markets, will likely provide a strong longer-term momentum for a relatively steady appreciation of the ringgit.
“Hence, we are revising our year-end US$/RM target to 4.15 from our earlier projection of 4.35,” it said.
The ringgit dropped 0.14% to 4.2645 against the US dollar as at 5pm yesterday.
HLIB Research foresees no interest rate hike in the second half of the year given the recent challenges from the weakening of commodity prices.
Meanwhile, Kenanga Research believes the Federal Open Market Committee’s decision is not likely to sway Bank Negara’s Monetary Policy Committee towards raising the Overnight Policy Rate above the current 3%, beyond affirming continued strength in advanced market economies.