Ringgit expected to face headwinds due to successive rate hikes by the US Federal Reserve - Manokaran

CURRENCY

The Ringgit ended on a slightly lower note at RM4.2075 / USD1.00 as I believe that the local currency has started to price in a second rate 25 basis points hike by the US Federal Reserve at the next Federal Open Market Committee meeting in 3-4 May 2022.

The next Bank Negara Monetary Policy Committee meeting is on 10-11 May 2022 and the consensus view is that the MPC will maintain the current Overnight Policy Rate (OPR) at 1.75% for the first half of 2022 as inflationary pressures in Malaysia is still contained.  

I expect the Ringgit to face headwinds this year from successive rate hikes by the US Federal Reserve, who have indicated that its FFR would hit between 1,75% to 2.00% by the end of 2022. 

Performance of the Ringgit against major currencies was mixed last week. The Ringgit continued its rally against Japanese Yen which continued to fall to a 6-year low against the Ringgit at RM3.4550 / JPY100.

The Ringgit also marginally strengthened against the Euro at RM4.6315 / EUR1.00 but weakened against the Singapore Dollar at 3.1031 / RM1.00 and British Pound RM5.5458 / RM1.00.

In the coming week, I expect the Ringgit to consolidate at a band of between RM4.18 to RM4.23 but it is likely to be on a downward bias as it continues to price in the anticipated interest rate hike by the US Federal Reserve in May 2022.

ECONOMY

Department of Statistics Malaysia has disclosed that the Consumer Price Index (CPI) has increased by 2.2% to 125.2 in February 2022 from 122.5 in February 2021. Food inflation continues to be the main driver for the CPI led by a 3.7% increase in the food & non-alcoholic beverages group. The food at home and food away from home segments posted a 4.1% and 3.6% y-o-y increase respectively.

Meanwhile, the transport group registered a 3.9% y-o-y due to the rising prices of RON95 which averaged RM1.96 per liter in February 2021. The current ceiling price of RON95 at RM2.05 per litre was set in March 2021. The other groups that make up the CPI were the furnishings, household equipment & routine household maintenance (3.2% y-o-y), restaurants & hotels (2.6% y-o-y) and recreation services & culture (1.6% y-o-y).

The Malaysian Automotive Association (MAA) has submitted a proposal to the Ministry of Finance (MOF) to revert to the previous calculation methodology (which did not include non-manufacturing related costs in calculating the open market value) in order to avoid an increase to the Completely Knocked Down (CKD) cars post 2022.

MAA said the implementation of the new excise duty may result in CKD car prices to rise by 8% - 20% due to increases in taxes. In addition, MAA is also drafting an appeal to the MOF to extend the sales and services tax (SST) exemption period for new vehicles as the current SST exemption period for new vehicles will end on 30 June 2022. 

InvestKL is targeting to attract RM35 billion worth of investments by 2030. Since its inception in 2011, it has managed to secure a total of RM18.3 billion worth of approved and committed investments through the establishment of 116 global services hubs by multinationals. In 2021, a total of 13 global services hubs were created in Greater KL of which 60% were from the US, UK and Europe while the remaining 40% came from Asia. 

Bank Negara Malaysia has launched the Malaysia Islamic Overnight Rate (MYOR-i) in an effort to spur the development of innovative Shariah compliant financial products to deepen the country’s onshore Islamic financial market and create transparency for market players to negotiate and standardize their financial contracts. The MYOR-i will replace the Kuala Lumpur Islamic Reference Rate (KLIRR) which will be discontinued with immediate effect.

Fitch Rating has cut their growth outlook for the world’s gross domestic product (GDP) for both 2022 and 2023 by 0.7% and 0.2% to 3.5% and 2.8% respectively due to high inflationary pressures and the rise of energy prices caused by the on-going Russia-Ukraine conflict.

Fitch expects the US Federal Reserve to steadily raise rates to 3.0% by the end of 2023 and also expects the European Central Bank to increase the main refinancing operations rate by 25 basis points in 1Q2023. Fitch has forecasted the US, Eurozone and China’s economies to grow by 3.5%, 3.0% and 4.8% respectively in 2022.

MARKET

As expected, the KLCI edged higher to end the week at 1,603.30 points (+12.05 points or 0.75%) as bargain hunting activities continued during the week – especially in the mid and small caps. In addition, foreign investors were also net buyers throughout the week providing steady support for the big cap stocks.

The recent market movements lend credence to my view that a lot of the negative news has already been priced in by investors and the market is only waiting for the right time to rally higher. There I continue to maintain my view that the market direction will continue to be determined by news flow and that the 1,600-point level will continue to be a consolidating point for the KLCI Index.

Key risks to the equity market would be the continuing wave of Covid infections across the world, the on-going Russian-Ukraine conflict and inflationary pressures. Resolution of these flashpoints would be the catalyst for the market.  – DagangNews.com

Manokaran Mottain has been an economist with a number of financial institutions is now managing his own firm, Rising Success Consultancy Sdn Bhd