Analyst says ringgit could surpass 4.8 against the US dollar if China allows yuan to depreciate

KUALA LUMPUR: Analysts say the ringgit is in for another bout of weakness with a depreciation in the Chinese yuan possibly pushing the ringgit to surpass 4.8 to the US dollar levels, amid a delay in US rate-cuts.

The ringgit traded at 4.7650 against the US dollar at noon today, down from 4.7490 against the dollar at noon on April 9, 2024.

SPI Asset Management managing director Stephen Innes said the local note may continue to weaken until the Federal Reserve signals a rate cut, a move that will only happen in the event of inflation easing or a significant deterioration in US economic data, possibly in the fourth quarter. 

Higher-than-expected US inflation has dimmed hopes for a June rate-cut.

"With the US dollar acting as one wrecking ball and the potential for a weaker yuan acting as another, Asian currencies could face significant pressure," he told Business Times.

Innes said two scenarios could play out, the first, if the People's Bank of China (PBoC) allows the yuan to depreciate, it could result in the US dollar surpassing 4.80 against the ringgit.

"Secondly, if Federal Reserve rate cuts are postponed, the US dollar may fluctuate between 4.73 and 4.78 against the ringgit," he noted.

Tradeview Capital Sdn Bhd vice president Tan Cheng Wen agreed that the ringgit is likely to see continued weakness in the near term.

"The current situation may end up not being the tailwind that we had expected to strengthen the ringgit as the interest rate differential will not be narrowed in the short term," he said.

Tan added that US inflation data coming in stronger than expected, the futures contracts tied to the fed-funds rate is projecting rates to end at around five per cent.

He said this implies just one or two rate cuts this year. 

"This is in stark contrast to the initial six to seven rate cuts that the street was expecting back in January this year," he told Business Times.

Nevertheless, Tan said the long-term outlook of the ringgit should bode well for the local note once these interest rate differential rates narrow.

He said the ringgit's strength will be coupled with the execution of the many frameworks and blueprints such as the National Energy Transition Roadmap (NETR), New Industrial Master Plan 2030 (NIMP) and Madani framework to boost foreign direct investment (FDI).

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