KUALA LUMPUR: The ringgit strengthened 1.2 per cent against the US dollar yesterday following the positive surprise sovereign outlook by Fitch Ratings.
Maybank FX Research said the ringgit could test lower higher versus the US dollar, possibly towards 3.65-3.70 levels over the coming weeks.
With the sovereign rating downgrade concern out of the way, the ringgit has rebounded.
On Monday, the ringgit sank to a 10-year low, spooked by news about a credit outlook downgrade by Fitch Ratings as well as the debt crisis in Greece.
Yesterday, it opened at 3.7685 versus the US dollar and at 5pm, it traded at 3.7485 versus 3.7733 on Tuesday.
In its latest review, Fitch Ratings affirmed Malaysia’s long-term foreign currency issuer default rating at A- and local currency IDR at A.
The positive surprise, it said, came through the upward revision to the outlook on long term IDRs to stable, from negative.
However, risks place it as one of the most vulnerable currencies in the region, warned forex analysts.
Describing the appreciation as a knee-jerk reaction, prompting a 1.2 per cent gain for the ringgit yesterday, analysts said the currency has remained under pressure.
Looking into a three-month horizon, Maybank said upside downside pressure towards 3.80-3.82 cannot be ruled out.
This could be due to a combination of factors such as a possible US Federal Reserve Fund interest rate hike, financial market volatility from Grexit risks, China growth risks, contingent liability risks and vulnerability to external economic shocks.
“The strong US dollar is likely to put pressure on commodities with negative impact on the ringgit,” said Maybank, adding that some stability is likely to return to the ringgit over the next one year as fiscal consolidation gains traction and external vulnerabilities dissipate.
Economist Michael Wan also thinks the positive impact on the ringgit would likely be short lived. was cautious about the positive impact on the ringgit.
“By itself, this move is positive on the ringgit, and most importantly removes the uncertainty surrounding a potential downgrade at least over the next few months.
“We still see the ringgit as vulnerable,” he remarked, referring to the factors based on economic fundamentals.
The current account is expected to deteriorate in the second and third quarters before it improves in the fourth quarter, due to the oil price moves.
Wan pointed out that that with domestic outflows still remaining large, this could also reflect payment of short-term external debt by banks.
Credit Suisse expects the ringgit to trade at 3.83 in three months as well as in 12 months.