KUALA LUMPUR: The ringgit, which has firmly been positioned as Asia's best-performing currency this year, could hit a high of 4.25 against the US dollar by year-end with the start of the much-awaited US Federal Reserve (Fed) rate cuts this week, but this will be largely dependent on how big a cut it makes, Fed's forward guidance, the strength of the US economy and the US presidential elections.
"The narrowing in the interest rate gap between Fed Fund Rate (FFR) and overnight policy rate (OPR) would be the main driving force for ringgit appreciation.
"In addition, the appetite for economic reforms would also lead to greater interest from the foreign investors to invest in the Malaysians assets which will effectively create more demand for ringgit," Bank Muamalat chief economist Dr Mohd Afzanizam Abdul Rashid told Business Times.
He that larger rate cuts would reduce the interest rate gap, thereby increasing demand for the ringgit.
Afzanizam added that if the US economy falls into recession, it might lead Bank Negara Malaysia (BNM) to switch its stance towards preserving growth as Malaysia is such an open economy.
"Any significant change in global demand would have material impact to growth. "Otherwise, the BNM might want to keep the OPR steady as the current monetary policy stance is supportive to growth," he said.
The Fed is widely expected to announce the start of rate cuts on Wednesday (Thursday local time), after a period of elevated borrowing costs, which have reached their highest levels in almost two decades.
Economist Dr Geoffrey Williams said the possibility of a rate cut by the Federal Reserve this week has already been priced into the value of the ringgit, which has appreciated strongly.
Therefore, he said while there might be some remaining trades among those who have waited, most of the potential impact of the rate cut has already been factored in.
"If the cut is bigger around 50 basis points (bps) there may be further strengthening of the ringgit. If it is smaller around 25bps the ringgit will be mostly stable," he said.
On OPR, Williams said BNM has already set out its policy position and is unlikely to change if there is a rate cut. Hence, he expects the OPR will remain at 3.0 per cent for the foreseeable future. Meanwhile, SPI Asset Management managing director Stephen Innes said that whether the Fed opts for a 25bps or a 50bps cut, the real market driver for foreign exchange (FX) will be the dot plot and forward guidance.
He added that if the Fed's outlook isn't as dovish as the 250 bps cuts that bond markets are pricing in, we could see US yields climb.
"In that case, even with a short-term dollar selloff, the US dollar versus ringgit might return to where it started," he said. Innes also noted that with FX markets pricing in a 70 per cent chance of a 50bps cut, the dollar should initially weaken if the Fed follows through.
Nevertheless, he explained that Asia's FX could face challenges if Trump wins, as forecasts suggest he's likely to win by a wide margin despite a close popular vote.
"If he does, his first move will likely be slapping tariffs on China, which could send the global economy, particularly China, into a deeper tailspin. That would spell trouble for the ringgit.
"These are key for the ringgit this week and beyond into year-end. "I still think the ringgit will trade stronger versus the US dollar to 4.25 by year-end, but US political risk has me guardedly optimistic," he noted.
The ringgit started off the day strong at 4.2930 against the greenback, before settling at 4.294 at 5pm. The ringgit has rebounded by some 12 per cent from the year's lowest point of RM4.79