KUALA LUMPUR: Public Investment Bank Bhd (PIVB) has revised the ringgit’s projection to RM4.00 against US dollar for 2019, compared with RM4.04 previously, on the back of new developments in the US interest rate direction.
In a research note yesterday, it said the US Federal Reserve (Fed) had put on hold the movement of Federal Funds rate (FFR) in 2019, a surprise change from its previous decision to undertake two more hikes this year.
It said the previous decision was made under different circumstances and before intensification of the trade collision with China, whereby, clouds have turned darker following the longer-than-expected negotiations.
The Fed has also cut its 2019 expectations for economic growth, inflation and unemployment, the research house.
“It now sees economic gains of just 2.1 per cent this year, down from the 2.3 per cent estimated in December, and inflation only reaching 1.8 per cent, while the unemployment rate is now at 3.7 per cent.
“Weaker household spending and business fixed investments in the first quarter have been cited as reasons for the slowdown, although we think the 35-day government shutdown in January and diminishing impact from tax cuts and fiscal stimulus, have also thrown a spanner in the works.
“Above all, the strength of the US dollar has been hurting the US economy, worsening its imbalance positions amid full employment and rising wages,” PIVB said.
It said this new prospect will have a resonating impact across the global capital, currency and asset markets with emerging market economies (EMEs) standing to benefit the most.
“The pause in FFR may be a conduit to a normalisation in global financial conditions which have been affected by the US policy moves.
“This could shore up risk tolerance and bring down risk premiums in EMEs capital markets which have borne the brunt of capital market volatility. The pause could clamp volatility and push investors to resume their searches for yield in the region,” it added.
According to PIVB, Malaysia could be the immediate target, driven by higher real rate of return vis-a-vis the US, due to its higher interest rate and benign inflation.
It said moving forward, Malaysia’s key indicators are set to benefit from this new dynamics, especially the ringgit and forex reserves.
“The ringgit could gain from higher risk tolerance in capital markets, while forex reserves could benefit from translation gains in 2019, a reverse position against 2018, though there remains uncertainty in view of the macroeconomic risks in advanced economies.
“The rise in the local currency might not affect exports given the competitive ringgit on real effective terms,” it added. –Bernama