Ringgit's outlook dimmed by trade disputes

Fitch Solutions Macro Research has reassessed its 2019 average forecast for the ringgit to RM4.15 against the greenback from RM4.05 previously.

It said this reflected the bear market assessment of the ringgit in light of the escalation of the US-China trade war in May.

“We remain slightly bearish on the unit over the long-term and maintain our 2020 average forecast at RM4.25/US$.

“The state of global trade relations will have a big impact on the ringgit's performance over the forecast period, and we outline an upside and a downside risk scenario,” the research firm noted in a statement today.

The research firm said over the second quarter of 2019 (Q219) Malaysia, as with other emerging market currencies, has seen increased fluctuations due to external events.

“The unit depreciated sharply following the tit-for-tat tariff hikes imposed by the US and China against each other in May to reach close to the key support level of RM4.20/US$ (but did not breach it) towards the end of May, averaging RM4.19/US$ in the final week on a year-to-date basis.”

Despite the ringgit strengthening slightly since June, the firm explained it decided to revise its forecast for the year to RM4.15/US$.

This is as heightened US-China trade tensions would continue to put emerging markets at risk in the coming months, it said.

“We believe the balance of risks over the coming months will remain tilted to the downside.”

“[...] It is likely that sentiment will remain less favourable for emerging markets compared to Q119 when the MSCI World Index emerging market ratio averaged 1.97, amid heightened trade tensions, which would see the ringgit remain weak over the coming months.”

Meanwhile, in its long term assessment of the ringgit, from six months to two years, the firm maintained its “slightly bearish long-term outlook” on the ringgit.

“We still expect the unit to average RM4.25/US$ in 2020.

“[...] The ringgit is still likely to trade within the long-term range between RM3.80/US$ and RM4.50/US$ over the coming quarters. The key support of RM4.50/US$ has never been meaningfully broken, while the RM3.80/US$ resistance has held since August 2015.”

Fitch Solutions said the weakening forecast for the ringgit could also be influenced by less favourable terms of trade “likely due to the soft crude oil market in May and anaemic price growth in crude palm oil, both of which are key Malaysian exports”.

However, it said it would bode well for Malaysia in the event the situation between the US and China remain stagnant, the two countries reach a deal, or that there is no escalation in trade disputes between the US and other partners such as Japan, India and European Union.

In such a scenario, the firm stated its average 2019 and 2020 forecasts for the ringgit under this scenario will be RM4.10 and RM4.20 to the dollar respectively. - Mkini