In view of the next FOMC meeting on March 14-15, the market has fully priced in a 25bps rate hike on the back of a stronger job market and accelerating inflation. We concur with the market’s view for a rate hike with a 95% chance. The current pullback may continue post-FOMC meeting. We believe much of the good news has already been priced into the USD at current levels. Yields are high and spreads are wide to keep the USD broadly supported against its major currency peers for the moment. Besides, the focus is on the message that the Fed delivers. In December 2016, the Fed looked at 3 rate hikes to which we have placed a 70% chance while our 2-rate hike probability is 90%. Besides, room for 4-rate hike is at a 45% chance as we take the view that a March hike will provide more flexibility for potential rate hike cycle for the rest of 2017 up to four times.
Looking at the DXY, there is room for a slight strengthening should the tone of the meeting be hawkish. The DXY index could gain to close at 102 based on our fundamental analysis. It could mean that gold should weaken a bit more from the current level of US$1,198/oz to about US$1,181/oz. However, the upside of DXY may not last long, possibly reaching a low of 99.9 if uncertainty gets louder especially from Europe. During this period, we believe gold will come back to the radar with an upside of US$1,250. In the case of ringgit against the USD, we expect the local currency to weaken to as low as 4.45- 4.47 from a rate hike on an immediate note, while the upside is around 4.437. Against the euro, we expect the downside for ringgit to be around 4.74 on an immediate note while the upside is around 4.65-4.68.
Also in the meantime, uncertainties especially the outcome of the Netherlands’ election will have some impact on the USD, and in return will provide some trading opportunities for gold. Once the Fed has raised rates, the reality would have set in and the focus will be on the uncertainty in euro. Should we price in a rate hike plus the uncertainty, our estimate on the ringgit against the dollar is around 4.41 to 4.43 from current level of 4.45. As for the ringgit against euro, we think the ringgit will strengthen from the current level of 4.73 to around 4.57-4.60.