KUALA LUMPUR, Jan 8 – The United Overseas Bank (UOB) believes that the ringgit is still undervalued and has the potential to gain further on the US dollar and other currencies.
And barring any unexpected results in the next general elections, which UOB expects the ruling Barisan Nasional to win, investment flows is expected to pick up and add momentum to the ringgit’s appreciation.
The ringgit closed at a 17-month high of 3.9950/0000 against the US dollar last Friday and open at a 19th-month high of 3.9880/9930 against the greenback today.
UOB pointed out in its Macro Note released today that in the past two elections, the ringgit weakened a year after polls, mainly due to external factors such as the global financial crisis, oil price slump, and the US Federal Reserve’s taper tantrum.
“Economic conditions are stronger than in 2008 and 2013. Real GDP accelerated to three-year high of 6.2 per cent year-over year in third-quarter of 2017, prompting us to raise our 2017 growth outlook to 5.8 per cent.
“Higher interest rates as stronger growth conditions provide a basis for BNM to normalise interest rates, and the recovery of oil prices is expected to continue into 2018 underpinned by the synchronised recovery in global demand,” the bank’s senior economist Julia Goh said in the note today.
“Assuming no unexpected surprises in the coming election, this provides greater certainty on the medium-term political and economic outlook. As such, we expect investment flows to pick up post-elections and support further Ringgit strength,” the report said.
It added that key risk to this view would be a more aggressive pace of US Federal Reserve rate hikes that could push the US dollar higher and renewed weakness in crude oil.
However, UOB noted that any ringgit weakness is expected to be more gradual given that current foreign ownership of Malaysia’s bonds and stocks is relatively low.
Furthermore, Bank Negara Malaysia has a larger chest of foreign reserves to support the ringgit (US$102.4 billion as at end-2017) thanks to sustained current account surplus and foreign direct investment flows while portfolio investments have improved.
It also noted that onshore foreign exchange conditions have stabilised since new foreign exchange regulations were introduced in December 2016.