Since the last Fitch update in September 2021, the ringgit has weakened further in line with our view, slipping by 1.1% against the dollar to trade at RM4.22/USD as of December 2, from RM4.204.18/USD on September 24.
“This brings the year-to-date average to RM4.204.14/USD, which is just shy of our 2021 average forecast of MRM4.204.15/USD. While we expect the ringgit to continue losing ground to the USD in H122, we expect USD strength to wane in H222 and this should see the RM4.20 average around RM4.20/USD in 2022, a forecast which we maintain, says Fitch.
RM To Average 4.20
From a technical perspective, says Fitch, the ringgit has breached the key level of support at MYR4.20/USD and has traded above this level since November 24 2021.
The RM weakened following the release of the November Fed meeting minutes, which showed that FOMC members were growing even more concerned about inflation and are willing to tighten policy sooner if prices grew too quickly.
Fitch sees a rough balance in both depreciatory and appreciatory factors from a fundamental perspective, “which inform our average forecast of RM4.20/USD. In terms of depreciatory factors, monetary policy will dominate, whereby a more hawkish US Federal Reserve is likely to put more pressure on the ringgit over the coming months, although this will be offset to some degree from the likely monetary tightening by Bank Negara Malaysia (BNM).
“Indeed, we expect the Fed to implement its first interest rate hike in 2022, and expect another hike in 2023. However, any depreciatory pressure is likely to be mitigated, as our base case is now for the BNM to hike its Overnight Policy Rate by a total of 50bps in 2022, in order to maintain its interest rate differential against the Fed and to build up policy buffers for future shocks. Moreover, real interest rate differentials are still in favour of the ringgit, as we expect average real interest rates of -0.3% for Malaysia in 2022, against -4.2% in the US,” it says.
OMICRON LOOMS
Fitch also forecasts a strong economic recovery in 2022 with a 5.5% growth, which will provide support to the ringgit, although this view may be at risk over the short term given the emergence of the Omicron variant.
The uncertainty stemming from the variant could potentially first, trigger a flight to safe-haven assets and see the ringgit (alongside other EM currencies) weaken against the greenback, and second, disrupt economies at both the domestic and regional level and further weigh on the ringgit.
“That said, economic fundamentals in 2022 are still set to improve in our view, as the much higher vaccination rate of 78.4% is likely to see the economy remain resilient in the face of even the Omicron variant, which will help limit depreciatory pressure on the ringgit.”
Over the long term, Fitch forecast the ringgit to trade broadly sideways and trade at an average level of 4.20/USD in 2022.
“Moreover, we also forecast an average exchange rate of RM4.20/USD for 2023, due to a similar balance of upside and downside factors, which should see the RM continue to range-trade between RM4.00/USD and MYR4.30/USD. On the upside, economic fundamentals are likely to at least remain stable in 2023 with a more fully vaccinated population, while undervaluation of 8.5% compared to its ten-year average in the real effective exchange rate (REER), suggests less risk of a large sell off.
“Furthermore, we expect USD strength to wane in H222, which should see the RM end the year in a slightly stronger position. Malaysia’s growth advantage over the US in both 2022 and 2023 will be another source of support. We forecast Malaysia’s real GDP to expand by 5.5% and 3.8% in 2022 and 2023, respectively, against 3.7% and 2.1% for the US.”
