KUALA LUMPUR: The ringgit will be driven by firmer Asian currencies which are benefiting from the interest rate, as well as growth differentials between the region and industrial economies, said AmBank Research.
Support for the local note will also strengthen if the United States’ (US) recovery is hindered by rising Covid-19 cases, renewed local lockdowns and as the US Federal Reserve embarks on more quantitative easing programmes to stimulate the economy.
This will result in asset reallocation which would likely benefit the region, especially since China is expected to be the first major economy to emerge from a severe economic contraction, it said in a note today.
“The region’s currencies are expected to appreciate by 0.5 per cent in the next three months and continue to climb around one per cent in 12 months’ time, in spot terms,” the research house said.
However, the ringgit’s performance could be influenced by a second wave of Covid-19 infections globally, leading to lockdowns, as well as trade wars, geopolitical tension and vulnerable commodity price movements.
It could also be affected if the global economy and/or domestic economy fails to reflate post-Covid-19, as well as the downgrade risk by FTSE Russell and rating agencies.
“Overall, the Malaysian economy may have hit the trough in the second quarter of 2020 and should modestly improve in the second half 2020, supported by the recovery measures,” AmBank Research said.
The research house also noted the highly supportive role played by Bank Negara Malaysia (BNM).
It said that to-date, BNM has reduced the overnight policy rate (OPR) by a total of 125 basis points to 1.75 per cent, and allowed all banks and principal dealers to use Malaysian Government Securities (MGS) and Malaysian Government Investment Issues (MGII) papers to fully meet their Statutory Reserve Requirement (SRR) compliance until May 31, 2021.
“Such policy measures will allow banks and principal dealers to ‘substitute’ their MGS and MGII holdings for liquidity locked under the SRR,” it said.
BNM’s highly supportive stance was also reflected in some of the measures taken to support businesses and households during the movement control order (MCO), the research house said.
It noted that fiscal spending was raised to RM295 billion, with a direct injection of RM45 billion to support the economy impacted by the pandemic.
There was also growing evidence of a gradual pick-up in some business activities with the easing of the MCO, backed by the monetary stimulus and fiscal support.
“The Purchasing Managers Index has steadily climbed above the expansionary/contraction threshold in June.
“The easing of the MCO has resulted in stronger trade in June, and exports to key destinations like the US, China and Japan had a strong run in that particular month,” it added. – Bernama