US Fed's rate decision positive for ringgit

THE US Federal Reserve's (Fed) decision to keep interest rates on hold until "at least 2014" is positive for the ringgit as it supports capital inflows, says Standard Chartered Bank (StanChart).

The bank has raised its foreign exchange (forex) rating on the ringgit to "neutral" from "underweight".

"This reflects our expectation that the ringgit will perform in line with trading-partner currencies over the coming three months," said its analysts Thomas Harr and Edward Lee in a report yesterday.

The recent recovery in the global industrial production (IP) cycle will support the ringgit over the next one to two months, in line with the historical lead, they added.

The ringgit was quoted at 3.0415/0445 versus the US dollar compared with Thursday's closing rate of 3.0400/0430.

But they said it was too early to be bullish on the ringgit for the medium term with the risk of a sharp global growth slowdown or a financial shock from Europe remains high.

StanChart has adjusted its forecasts to 3.12 and 3.18 for the first and second quarters respectively.

"The forecast changes reflect the fact that the ringgit weakness we have been looking for may be postponed until the second quarter, in line with the usual seasonal pattern."

StanChart expects Malaysia's growth to ease to 2.7 per cent in 2012 from 4.8 per cent in 2011, while the US is expected to grow 1.7 per cent, Europe to contract by 1.5 per cent and China to grow by 8.1 per cent for 2012.

Forex analysts expect the Fed's decision will enable Asian currencies such as the ringgit to enjoy increases.

Singapore-based Maybank FX Research said the forex market is expected to see continued volatility in Asian currencies, particularly in the open economies in the Asean region, that is the Singapore dollar and ringgit.

"This will be in part due to weaker economic growth and fundamentals, especially out of Europe, as well as finicky financial flows in response to headline news in this environment of relative uncertainty.

"In addition, some over-shooting or over/under-pricing either way, particularly in response to, for example China data releases or eurozone headline news, will exarcebate the volatile situation in some of these currencies over time," Maybank FX said.

Other currencies in the region such as the rupiah, baht and peso, which are part of the intra-Pan Asian trade network, will inevitably move with global risk developments but less so compared to Singapore dollar and ringgit.

"The extent of the volatility can be seen in the month-to-date changes for US dollar/ringgit, US dollar/Singapore dollar, US dollar/Philippine peso, US dollar/Taiwan dollar, US dollat/baht and US dollar/rupiah, respectively at -3.8, -3.0, -2.0, -1.3, -0.7 and +1.0 per cent," it noted.