PETALING JAYA: The ringgit has rallied back to its August 2014 levels, recovering from the lows seen last year as US Federal chair Janet Yellen reiterated her cautious stance on the market and future rate rises.
The ringgit is at its year-to-date high and closed at 3.9352 against the US dollar.
The currency has gained some 10.85 per cent, as risk sentiment has perked up following a confirmation by Yellen.
Nomura said that it was "broadly positive" on the ringgit from a macroeconomic standpoint.
According to the research house, Malaysia has resilient macroeconomic growth, credible fiscal and monetary policy amid reduced political risks, higher commodity prices and forex valuations that are going in its favour.
"The dovish speech from US Federal chair to the Economic Club of New York is also likely to support expectations of a reduced group of three monetary policy divergence (and a softer US dollar), which was our view following the March 17 Federal Open Market Committee meeting," Nomura said yesterday.
"We believe that upcoming inflows (expected in April) related to state oil company dividend payments to the Government and a possible increase in investor allocations into Malaysia could prompt a continuation of the ringgit's outperformance in the near term," it added.
Given these circumstances, Nomura said it continues to remain long on the ringgit versus the Singapore dollar, which is a position it had continued to recommend with conviction since November 2015.
However, Nomura also had some caution on the ringgit, noting that the retirement and replacement of Bank Negara governor Tan Sri Dr Zeti Akhtar Aziz whose term ends at end-April would be closely watched by the market.
"On March 14, after The Wall Street Journal reported on March 12 that Tan Sri Mohd Irwan Serigar Abdullah was to become the new governor, the ringgit depreciated against the US dollar by 40 basis points and underperformed in the region. This is indicative of some investor trepidation towards a government or political candidate," the research house said.
The report also highlighted its view of the reduced ringgit vulnerability driven by the exodus of foreign investors who had anticipated a ringgit appreciation from Bank Negara's bills.
"We also believe that asset managers are still mostly 'underweight' on Malaysian bonds, but there is an emerging shift towards increasing allocation," it said.
A technical analyst said that the rally could be sustainable in the near term and expected the ringgit to reverse to its long-term mean trendline with an immediate target of 3.1600 to the US dollar.
"Another reason for our positive ringgit view stems from the changing structure of foreign bond ownership increasingly towards more long-term investors such as central banks/sovereign wealth funds and pension funds," Nomura added.
The research house felt that sentiment toward the ringgit was most negative toward the end of September 2015 at the same time when foreign holdings of Bank Negara bills in both the conventional and Islamic financial markets fell by RM58.7bil (around US$14.7bil) to RM22bil.
"It was a significant contributor to the ringgit depreciating by 16 per cent against the US dollar," it said.
The research house said that sentiment toward's the country's financial assets "progressively improved" in the later part of 2015 mainly due to political and fiscal factors and commodity prices; and pursuant to this bond/bill related flows have also correspondingly improved.