Prospect of US rate hike weighs on ringgit: MIDF Research

PETALING JAYA: MIDF Research, which revised its ringgit 2016 year-end forecast to 4.35 to the dollar from 4.10 to the dollar, expects the ringgit to remain under pressure due to an imminent rate hike by the Federal Reserve next month.
“The market is anticipating Trump’s stimulus pledge estimated at more than US$550 billion (RM2.4 trillion) to spark inflation, higher growth and eventually forcing the Fed to raise interest rates at a faster pace than earlier anticipated. Traders are pricing in a 98% probability for 25 basis points (bps) December rate hike on Nov 18, up against 84% the week before,” it said in its report yesterday.
It noted that the US dollar drew strength, with the dollar index moving past the 100 points for the first time this year while ringgit, along with other emerging market (EM) currencies took a hit. The ringgit closed at 4.4183 on Nov 18, down by 4.9% since Nov 8.
The net foreign outflow from the equity market for this month as of Nov 18 stood at RM2.57 billion, reflecting the biggest outflow since May this year but despite the huge sell off, the ringgit could repeat last year’s post Fed rate hike rally.
“Recall that foreign funds returned to EM markets including Malaysia early this year as Fed turned dovish as US economic data was worse than expected. The planned four rate hikes did not materialise and at some point, the market lost confidence in the Fed doing anymore rate hikes this year. We think a similar situation could happen in 1H17,” said MIDF Research.
It said that leading indicators are pointing towards further moderation in the US economic growth and private investments have been in the negative for three consecutive quarters while corporate earnings are set to register the sixth successive decline in earnings.
The research house is sceptical about whether the US government will have the money to pursue Trump’s fiscal policy manifesto, which includes cutting taxes and spending on infrastructure.
“Note that the federal debt limit will be reinstated on March 2017, and with US current debt level close to US$20 trillion, it is yet to be known whether president-elect Trump will be able to follow through with his economic plan.
“However, we would expect that the current high yield and flow of funds into the US economy will continue until the Fed conducts the widely expected rate hike in December 2016. Until then, the ringgit is likely to remain under pressure,” it said.
It added that the situation could turn for the better after Trump enters office on Jan 20, 2017 as clarity on much anticipated policy directions with regards to stimulus packages, trades and foreign engagements will provide bearing on the ringgit’s performance for the rest of 2017.
Post-election, Trump’s acceptance speech “soothed” the market and seemed to inject higher inflation expectation via anticipated stimulus pledges.
“We think greater expectation of inflationary pressure is transmitted and revealed in the current conditions of bond market. Regardless, the higher expectation has probably given what Yellen needs, a greenlight to proceed with the 25bps rate hike in the last of 2016 FOMC meeting come this Dec 14,” it said.
It expects the ringgit to remain under pressure with a trading range bound of between RM4.35/US$ - RM4.45/US$ throughout year-end.
It expects the ringgit to gain, especially in 1H17 on the presumption that commodity prices will stabilise at higher prices and the US economy’s growth will continue to underperform, recording below 2% year-on-year growth.
However, it maintained its forecast of another overnight policy rate (OPR) cut next year as the moderation in the Malaysian economy has yet to recede, leading the benchmark interest rate to settle at 2.75% by end-2017.
“This is because despite our expectation of a better trade performance next year, the lagged impact of slow trade activity this year will only start to prevail in 1H17, leading to a relatively weak domestic economy in 1H17,” it said.
As such, it expects the central bank to intervene to stimulate domestic economy, despite slight recovery from the external front. It expects the OPR to remain at 3% at the MPC meeting tomorrow.