Malaysian central bank likely to hike rate in January 2018, MYR still undervalued - Scotiabank

The Malaysian ringgit is believed to be still undervalued in terms of either the NEER or the REER, especially if taking into account the country’s growth and monetary policy outlook, noted Scotiabank in a research report. The upcoming 14th Malaysian General Election might trigger expectations of more pro-growth policies.

Even if the headline inflation of Malaysia is expected to slow down a bit in November and December due to the base effect, the BNM is expected to hike its overnight policy rate by 25 basis points to 3.25 percent in January 2018 as its real policy is in negative territory, noted Scotiabank. The Malaysian central bank has stated that it might consider reviewing the current degree of monetary accommodation and the MYR is “far from reflecting its fair value”.

Moreover, the current account surplus of the nation might broaden further in the midst of resilient oil prices and synchronized global growth as the nation is the sole net oil exporter in the region. Crude oil prices might continue with their modest rise into 2018 given the nine-month extension to OPEC-led supply cuts.

Brent crude oil has shifted into “backwardation” with near-term oil prices higher than those for delivery in the future from “contango” indicating signs that the oil market has been seeing that a rebalancing is underway.

“In the near term, a broadly strengthening dollar due to the progress on the US GOP tax plan could send the oversold USD/MYR higher. We maintain our short USD/MYR position with a new target of 4.00 and would like to add to the short position on rallies”, added Scotiabank.

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