MIDF Research said the ringgit still has room to strengthen further towards the end of the year, driven by fund inflows triggered by Fed’s potential rate cuts.
PETALING JAYA: The ringgit has strengthened to almost a year high against the US dollar amid growing expectations that the US Federal Reserve (Fed) would cut interest rates next month.
The Malaysian currency gained almost 1% yesterday to hit RM4.545 per US dollar, its highest in a year, before settling at around RM4.566 against the greenback. This marked the ninth consecutive day of appreciation of the ringgit, positioning it as the best performing currency in Asia year-to-date with a gain of 2.7% against the US dollar.
Maybank Investment Bank’s (Maybank IB) foreign exchange research head Saktiandi Supaat indicated that the ringgit was likely playing catch-up due to its undervaluation.
“The ringgit is probably performing catch-up because it was one of most underperforming currencies recently, and it has been undervalued for a long time,” Saktiandi was quoted as saying by Reuters.
Among the factors said to have contributed to the strengthening of the Malaysian currency are ongoing foreign inflows into the local bond market, the repatriation of funds from overseas by government-linked investment companies, as well as improving exports, which increase the demand for the ringgit.
According to MIDF Research, the ringgit still has room to strengthen further towards the end of the year, driven by fund inflows triggered by Fed’s potential rate cuts.
The brokerage said the ringgit is on track to end the year at around RM4.43 per US dollar.
“We expect the recent appreciation of ringgit to continue on the back of strong expectations for the Fed to begin embarking on rate cuts from the final quarter of 2024.
“We are sanguine that the ringgit will appreciate towards our year-end target of RM4.43,” MIDF Research wrote in its report.
The brokerage noted that the dovish tone by the Fed after its July 2024 Federal Open Market Committee meeting had bolstered expectations that the it is approaching closer to its first rate cut.
“The smaller US federal fund rate to Malaysia’s overnight policy rate differential is expected to promote greater foreign demand for Malaysia’s equities and bonds, which will support for further strengthening of ringgit,” it explained.
MIDF Research noted that as of the first half of 2024, foreign inflow into both domestic equity and bond markets totalled RM50.9mil, with recent indications pointing to further inflows, particularly into the bond market.
The domestic bond market saw an inflow of RM874.6mil in the first six months of 2024, offset by an outflow of RM823.6mil from the equity market.
“Recent data suggests a potential reversal of fund flow into the equity market in the second half of 2024, with the equity market registering a net foreign inflow of RM1.3bil in July 2024,” MIDF Research said.
“Similarly, the steep decline in the 10-year Malaysian Government Securities yield in July 2024 indicated further inflow into the domestic bond market.
“We anticipate a more aggressive inflow into Malaysia’s equity and bond markets due to rising appetite for riskier assets, once the Fed starts easing its interest rates, increasing the demand for ringgit,” it added.
Besides Fed’s rate cut expectations, Malaysia’s economic growth fundamentals would also support the ringgit to continue appreciating.
“We foresee a sustained rise in domestic demand, in addition to the recovery in external trade, will support Malaysia’s economy to grow stronger in 2024,” MIDF Research said.
The brokerage was currently reviewing its 2024 growth projection for Malaysia, stating it would not rule out the fact that a more resilient growth in the domestic economic activities could push Malaysia’s gross domestic product growth to more than 5%, higher than its existing forecast of 4.7%.
Meanwhile, Malaysia’s sustained current account surplus would also be another factor that would support the ringgit positive trend, MIDF Research said.
“As exports is expected to continue improving in the second half of 2024 on the back of growing external demand and improving electricial and electronics shipments, we expect Malaysia’s current account balance will remain in surplus,” it said.
“Moreover, following further improvement in tourism sector activities, we believe further services exports recovery will also underpin the sustained surplus in current account,” it added.
