Executive Summary

The MYR has appreciated, with the USD/MYR pair falling to near the 4.680 level currently from the recent high of 4.810. We note that several drivers have been aiding the sentiment of the MYR and we believe that these drivers will continue an advantageous re-positioning in the MYR currency in the short term (up to three months horizon). The drivers include:

• Stable and consistent BNM monetary policy direction pacifies the market, while the Fed is anticipated to go according to plan and cut the FFR by 2Q or 3Q2024;

• Statement by the BNM governor and the latest MPC meeting statement that there are coordinated efforts to boost inflows from abroad, primarily engagements with GLCs and GLICs to encourage more consistent repatriation and conversion of their foreign investment income; and

• There are signs that better pricing of DXY weakness and MYR undervaluation are driving FX conversions into MYR, pointed out by reversal in FX foreign currency deposits vis-à-vis total deposits.
   

As such, actual USD/MYR levels have fallen below our model forecasts. Meanwhile, our technical analysis suggests support at 4.65 in the next three months.

Drivers appear to boost short-term MYR positioning

We note that several drivers have been aiding the sentiment of the MYR of late, and we believe these drivers will continue an advantageous re-positioning in the MYR currency in the short term (up to three months horizon). The drivers include:

1. Stable and consistent monetary policy direction pacifies the market, while the Fed is anticipated to go according to plan and cut the FFR by 2Q or 3Q2024. Even though the quantum of all total cuts by the Fed is still unknown, at least one cut will still contribute an advantage to MYR rate differentials versus the USD;

2. Statement by the BNM governor and the latest MPC meeting statement that there are coordinated efforts to boost inflows from abroad; and

3. Better pricing of DXY weakness and MYR undervaluation may drive FX conversions into MYR.

Interest rate differential expectations boost short-term MYR outlook.

We note the recent USD depreciation, where the DXY index has fallen somewhat, below 103 from highs above 104 this year. The driver for the DXY is due to the recent release of weakening economic data, including last week’s US jobs reports. Furthermore, there was increased signalling from Fed officials that they would reduce interest rates, possibly by the 2Q or 3Q2024. The exact quantum of the Fed’s impending cut is still largely uncertain at the point of writing. Still, we posit that it is unlikely to mirror the Fed’s latest Summary of Economic Projections, although one cut is sufficient to ease MYR’s pressure against the USD. The most recent Fed Fund Futures pricing shows that the earliest rate cut is expected to happen in June 2024, and a total of 75-100 bps cut is expected this year.

Meanwhile, BNM maintained the OPR this month at 3.00%, and the latest MPC statement, we think, provides a neutral bias towards the direction of Malaysia’s monetary policy. We anticipate that BNM will maintain the OPR at the current level throughout this year despite the ongoing supply-side interventions. Yet, Malaysia’s economic fundamentals remain solid and far from a recession, unlike in advanced economies; the expected smaller interest rate differentials and the Fed’s clear signal of an impending rate cut are positive on the MYR. We maintain our end-year forecast of 4.50 with a possible downside of 4.60 per dollar.

Coordinated efforts to boost MYR flows

We note newspaper reports citing BNM Governor Datuk Abdul Rasheed Ghaffour, at his presentation at a Fitch Ratings symposium in Petaling Jaya last week, saying that the central bank and the government are elevating their engagement with government-linked companies (GLCs) and government-linked investment companies (GLICs) to support the ringgit. Governor Rasheed indicated that the engagements with GLCs and GLICs are to encourage more consistent repatriation and conversion of their foreign investment income. He added that the government is also stepping up engagement with international investors to showcase the positive prospects of Malaysia and that Malaysia remains a highly attractive destination for investment and business. The Governor sees the ringgit as undervalued, especially vis-à-vis Malaysia’s growth outlook of 4%-5% this year, supported by robust domestic demand and an improvement in the external sector. Last week’s MPC statement contained similar points - to encourage repatriation and conversion of GLC and GLIC foreign investment income, formalising the intention by the authorities. The MPC statement had the line: “These actions are contributing to greater inflows, lending support to a firmer ringgit. Over the medium term, ongoing structural reforms will provide more enduring support to the ringgit”.

We note that the EPF, possibly the largest Malaysian investors investing abroad amongst the GLCs and GLICs, as of the end of 2023, has an estimated MYR431 billion in investment overseas, based on EPF’s media release this month when it announced its total 2023 results including investment income. This is about a MYR74 billion increase from 2022, totalling MYR359 billion. Meanwhile, EPF’s investment income earned overseas is about MYR35.3 billion in 2023 or 53% of its total investment income generated for the year.

For now, as base case assumptions, we exclude investment income from other GLCs and GLICs, of which we lack adequate data. Hence, the MYR35.3 billion, if taken at face value from BNM’s recent comments, is amongst the targets for potential inflows back into Malaysia. However, potentially at least MYR35 billion conversion into MYR from other currencies is not a large sum considering the USD10-USD20 billion daily FX flows in the domestic market, Nevertheless, if EPF and other GLCs and GLICs do indeed repatriate the total sum of their overseas investment income back to Malaysia, the potential market signalling is enormous in our opinion as it reflects EPF’s confidence in the domestic capital market’s returns potential.

Before the recent official announcements, we observed that the USD/MYR exchange rate was highly elastic and sensitive to changes in the DXY index. Slight variations in the DXY index resulted in significant USD/MYR rate fluctuations. However, after the announcements, the exchange rate has become more stable and less prone to swings. This suggests that the announcements have positively impacted the USD/MYR currency pair and reduced its volatility. As such, we expect the authorities to be more attuned to the changes in USD/MYR in the days and weeks ahead.

Better pricing of DXY weakness and MYR undervaluation may drive FX conversions into MYR.

We note that foreign currency deposits in Malaysia, as a percentage of total deposits in the banking system, have reversed slightly downward. Data show foreign currency deposits turned lower from 10.5% in December 2023. The latest data as of January 2024 show this at 10.4% (MYR247.4 billion). Last year’s high was 10.6%, recorded in February 2023, before it dipped to 9.9% in March 2023, and brought on support to MYR as the USD/MYR fell 4.487 in February to 4.415 in March.

A play on a longer-term outlook on the back of a Fed cut deemed an advantage to MYR vis-à-vis US rate differentials should convince exporters that conversions into an undervalued MYR are beneficial. Also, as future pricing on rate cuts that the US Fed will undertake becomes clearer, it should improve risk appetite and provide upward impetus for emerging currencies, including the ringgit itself. And amid anticipated better MYR sentiment, Malaysian exporters’ conversion could follow suit if GLC inflows improve, boosting short-term MYR levels further.

Our in-house MYR model suggests a fair value of the currency should be nearer to 4.50/60, in which our model uses variables such as onshore interest rates, rates differential against the US, US dollar levels, and crude oil price.

Technicals suggest short-term support at 4.65 and down to 4.62 in the next three months

We repeat that our model forecast for USD/MYR is 4.710 at the end of this quarter, appreciating to 4.690 by the end of 2Q2024 and towards 4.500 by the end of the year. Our assumptions broadly include the potential narrowing interest rate differentials between the MYR and USD to be more beneficial to the MYR. Nevertheless, actual USD/MYR has moved below these levels (last week at 4.685). Again, we repeat that our model already suggests that the current fair value of USD/MYR is about 4.50/60.

Nonetheless, this paper attempts to explain our short-term bullish outlook for the MYR; our technical analysis (Exhibit 1) suggests that there should be support for USD/MYR at 4.65 in next three months’ horizon, being that the level is the key 50% Fibonacci retracement level and has been tested several times including during the late months of Jun and early July 2023, mid-August to early September 2023, and from November 2023 to mid-January 2024. In addition, we foresee a modest extension of a new downward channel (targeting the lower bound of the new channel in the next three months) after we noted the USD/MYR pair recently broke below a historical long-term upward channel (channel seen since December 2022) when the pair moved below 4.750 end of last month (which we covered in our Weekly Report last week). Moreover, there was a recent high in USD/MYR of 4.773, where technicals (RSI) showed a full oversold position.

Source: AmInvest Research - 12 Mar 2024