• Ringgit rise was too fast and ahead of fundamentals.
   
• Barrage of new stimulus measures from China.
   
• Ishiba wins LDP leadership, set to become Japan’s new prime minister.

• Latest Fed’s projections give more clarity.

• Stimulus and political surprise in Asia drive market sentiment.

• Local bond market is gaining the most.

• USA presidential election remains a risk.

Ringgit rise was too fast and ahead of fundamentals. Despite of clearer clarity by the Fed on its funds rate trajectory, we opine the appreciation of Ringgit is too fast which driven by hot money via bonds and equity markets. The rapid inflows could suffer a pullback especially there are changes of macro numbers in USA economy. The rapid appreciation may reduce Malaysia’s exports value and thus pressuring net exports contribution to GDP in 4Q 2024 and 2025.

The big news last week was the barrage of new stimulus measures from China. People’s Bank of China (PBoC) and financial regulators announced a wide range of measures to shore up the ailing economy: the policy rate was cut by 30bp, Reserve Requirement Ratios for banks were cut by 50bp, measures to increase buying in the stock market was launched and mortgage rates on existing loans will be cut by 50bp. On top of this, reports suggested China’s big banks will be recapitalized with CNY1tn (approximately USD142bn). Meanwhile, China top leaders dedicated their monthly meeting in the Politburo to the economy, which is not normally the case in September. They sent a clear signal that stimulus will be stepped up across the board and turning the economy has the number one priority now. It is the biggest round of stimulus since the current crisis started three years ago and could turn out to be China’s ‘whatever-it-takes’ moment.

China unleashed series of long-awaited monetary stimulus measures that ignited investor optimism. The 24-member Politburo reinforced this momentum by pledging to boost fiscal spending and, for the first time, committing to halt the decline in property prices. Additionally, the leadership unveiled a renewed focus on stimulating consumption to address public concerns. The timing is particularly advantageous, coinciding with global monetary easing efforts, including those by Fed, which is expected to bolster consumer spending - a positive development for China’s export-driven economy.

Ishiba wins LDP leadership, set to become Japan’s new prime minister. The election of former defence minister Shigeru Ishiba as the new leader of the ruling Liberal Democratic Party (LDP), positioning him as Japan’s next Prime Minister. Ishiba’s victory came after a closely contested leadership race, where he edged out hardline nationalist Sanae Takaichi in a run-off vote. Japanese Yen (JPY) surged in response to the news, reflecting investor sentiment toward Ishiba’s critical view of BoJ’s past monetary stimulus. Ishiba has openly supported the central bank’s current rate hikes, reigniting speculation that BoJ may raise interest rates again in December. The immediate market reaction was pronounced. JPY surged against major currencies, reflecting investor expectations of tighter monetary policy ahead.

Latest Fed’s Projections Give More Clarity.

After 50bps cuts on 18th September 2024, the central bank hinted for another 50bps in 4Q 2024. The Fed also highlighted 100bps cuts for 2025 and 50bps in 2026. By 2026, the median funds rate is 2.9%.

Stimulus and Political Surprise in Asia Drive Market Sentiment.

Unexpected developments from Asia significantly influenced global financial markets last week. China’s surprise stimulus measures invigorated investor sentiment, leading to substantial gains in Chinese and Hong Kong equities, as well as strengthening Chinese Yuan and the currencies of the emerging market also had a good day. The jury is out on whether this theme can be maintained. Additionally, we are starting to see USD/CNH trade below USD/CNY – something seen very rarely over the last couple of years. If USD/CNH breaks with momentum below 7.00, we think it would be broadly supportive of global EM currencies and help tilt the dollar lower. In Japan, Yen staged a sharp turnaround after Shigeru Ishiba unexpectedly secured leadership of the ruling Liberal Democratic Party, setting him on the path to become the next Prime Minister. Known for his hawkish monetary stance, markets quickly began speculating on whether his government would support more rate hikes from BoJ, further fuelling Yen strength. US Dollar (USD) also lost ground, weighed down by inflation data that cemented expectations for additional policy easing by Fed. Additionally, the record-breaking performance of DOW weighed on the greenback. Still, the DXY index remained sticky around 100.60. Simply put, the USD was in a tug of war between two opposing forces – 1) risk -on from China ’s stimulus and expectation of BoJ aggressive rate hikes, 2) stronger US data that lifted UST yields and USD.

Ringgit: Where It Was, Where It Is, and Where It Will Be

Following the Fed’s bigger than expected interest rate cut, the local note’s recent rally accelerated further, lifting the Ringgit to the strongest point since June 2021 (25 September 2024: RM4.12). This is due to the FFR cut snapping back against the biggest drag to the Ringgit movement previously: the OPR-FFR rate differentials. Just a fortnight ago, the FFR and OPR were at a standoff, the former being held elevated at a 23-year high. At this point in time, Ringgit had begun its climb on the back of rate cut expectations (17 September 2024: RM4.28). On the 18th September, with the supportive U.S. disinflationary trend and a considerably cool labour market, the Fed had taken the market by surprise with a 50bp rate cut (Est: 25bp) which brings the FFR down to a range of 4.75%-5.00%. Coupled with the steady OPR, the narrowing rate differentials had prompted a pickup in Ringgit’s momentum. Moving forward, we expect the Ringgit to appreciate further amid hints of another 50bps FFR cut in 4Q2024.

Ringgit Outperforming Other Regional Currencies

Nevertheless, the rate differential is only one facet of the local note’s rally. This is evident with the Ringgit appreciating against most of its peer currencies, obviously gaining tailwind from Malaysia’s strong economic fundamentals, favourable reform policies, solid investment momentum and an influx of foreign funds into the market. Notably, Malaysia had been the top destination for data centre and Artificial Intelligence (AI) investments, drawing the interest of tech giants such as Microsoft, ByteDance and Google. This on top of the myriads of ongoing development projects and capacity expansion projects, spurring the rapid growth of the construction sector. Additionally, the rosy outlook of Malaysia’s economy and the growth prospects of multiple sectors had caused investors to flock to the local equity market, fuelling the FBM KLCI’s winning streak (27 September 2024: 1,660.1 points, +14.1% YTD).

The Influx of Foreign Capital Buoyed the Appreciation of Ringgit

Of note, the local bond market recorded a cumulative net foreign inflow of RM17.7bn for the first eight months of 2024 with the latest reading in August 2024, displayed a net foreign inflow of RM9.0bn, the highest since July 2023. The local equity market also saw a cumulative net foreign inflow of RM3.3bn from January to August, lending a hand in strengthening the Ringgit. Overall, the Malaysian capital market received RM20.7bn of total foreign flows, YTD. As the market foresees that the Federal Reserve will cut rate cuts incoming in the remaining of this year, foreign investors will continue its buying spree of assets in emerging market, welcoming more foreign portfolio inflows.

Foreign Reserves Reached Nearly 3-year Peak in August Amid Foreign Portfolio Inflows

Bank Negara Malaysia’s foreign reserves continued its uptrend for four consecutive months, up by USD2.1bn MoM to USD116.8bn at the end of August (Jul: USD114.7) driven by increased foreign portfolio inflows which represents the highest reserve level since December 2021. The country's foreign reserves have increased by USD3.3bn in the first eight months of 2024, compared to a decline of USD2.2bn during the same period in 2023. The August’s foreign reserves position is sufficient to cover 5.4 months of imports of goods and services and is 1.0 times of the total short-term external debt. The import coverage ratio is well above the generally accepted minimum of 3 months.

Narrowing 10-YR MGS/UST Yield Spread to Enhance Attractiveness of Local Bonds

With the strong anticipation of monetary cuts by the Fed, the 10-YR US Treasury (UST) yield was on declining trend and hit 3.75% as of 27th September 2024. Meanwhile, Malaysia’s 10- YR Malaysian Government Securities (MGS) yield closed at 3.72%. With the prospects of more cuts by the Fed, we foresee the 10-YR UST yield to continue its downward trajectory, further narrowing the gap between MGS and UST yields, enhancing the appeal of Ringgitdenominated bonds.

OPR is Predicted to Stay Status Quo with Potential Upside.

Given that OPR to remain at 3.00%, the cuts by the Fed will boost the narrowing interest rate and bond yield differentials. Consequently, this will add more appreciation for the Ringgit with assuming no extraordinary externalities occurred. We view OPR has upside factors particularly with potential positive impacts of salary hike for civil servants and improving consumer spending amid postponement of RON95 subsidy rationalisation. There could be a chance for BNM to consider raising the OPR in contingent that Malaysian economy was to grow stronger than expected albeit resilient domestic demand and expansionary external trade activities.

Downside Risks Still Linger over Ringgit.

Even though macro perspectives are providing silver lining to Ringgit, downside risks on the currency remain especially with the uncertainties over the US Presidential election outcomes and continuous geopolitical conflicts in Middle East and Eastern Europe. The outcome of the presidential election may rattle global stock market due international trade policy concerns. An intensifying trade war with China will cause global supply chain disruptions, possibly reigniting price pressures and cause interest rates to be held elevated longer than anticipated. Recently, cracks have begun to form when the U.S. Trade Representative’s Office announced tariff hikes on Chinese imports with some hikes being multifold of the current level, such as the tariff imposed on Chinese electric vehicles (EVs) being raised to 100% from 25%. Malaysia, being a trading partner for the giant economy, will be negatively impacted too as the U.S. also had been cracking down on countries deemed to facilitate tariff evasion. As such, we opine the local equity flows will see more volatility after the presidential election results.

Being an Exporter Country

Malaysia is exposed with geopolitical conflicts. Further escalation of tensions in the Middle East and Eastern Europe may cause more volatility in global commodity prices. And to certain extend, such conflicts may lead global supply chain disruption. Nevertheless, as the Brent crude oil price to remain above $70pbd and CPO above RM3,500 per tonne, these are favourable prices for Malaysia’s exports market.

A stronger ringgit can have several impacts on Malaysia's exports. (1) Reduced Competitiveness. A stronger currency makes Malaysian goods more expensive for foreign buyers, potentially leading to decreased demand for exports. This can affect industries reliant on international markets, such as electronics and palm oil. (2) Impact on Profit Margins. Exporters may face squeezed profit margins if they cannot pass on higher costs to consumers. This could lead to reduced revenue for companies that rely heavily on exports. (3) Cheaper Import Costs. On the flip side, a stronger ringgit lowers the cost of imported raw materials and components, which can benefit manufacturers by reducing production costs and increasing profit margins domestically. (4) Diversification Opportunities. To mitigate the effects of a stronger ringgit, Malaysian exporters may seek to diversify their markets or shift their focus to value-added products that can justify higher prices. (5) Longterm Growth. While there may be short-term challenges, a stronger currency can indicate economic stability and investor confidence, which can foster long-term growth and attract foreign investment. Overall, while a stronger ringgit can pose challenges for exporters, it also offers opportunities for cost savings and market adaptation.

Will the Fed Opts For a Back-To-Back 50bps Rate Cut?

It was another dreadful week for the Greenback. In fact, investors remained largely sellers of the USD on the back of increasing perceptions of further easing by the Federal Reserve for the remainder of this year and 2025. In addition, the likelihood of a soft landing of the U.S. economy combined with extra rate cuts bode well for the risk-on sentiment, remaining a persistent threat to any attempt of recovery in the USD.

Although the USD slipped after the Fed decided to cut interest rates by 50bps and to signal that another 50bps worth of reductions are on the cards for the remainder of the year, the currency traded in a consolidative manner last week even with market participants pencilling around 75bps worth of cuts for November and December. A back-to-back double cut at the November gathering is currently holding a 50% chance according to Fed funds futures.

This week, investors will have the opportunity to hear from a plethora of Fed members, including Fed Chair Powell, but given that the dot plot is already a relatively clear guide of how the Fed is planning to move forward, incoming data may attract more attention, especially Friday’s nonfarm payrolls. But ahead of the payrolls, the ISM manufacturing and non-manufacturing PMIs for September may be well scrutinized for early signs of how the world’s largest economy finished the third quarter.

If the numbers agree with Powell’s view after the Fed decision that the economy is in good shape, then the USD could gain as investors reconsider whether another bold move is necessary. However, for the USD to hold onto its gains, Friday’s jobs report may need to reveal improvement as well. Currently, the forecasts are suggesting that the world’s largest economy added 145k jobs in September, slightly more than August’s 142k, with the unemployment rate holding steady at 4.2%. The average hourly earnings are seen slowing somewhat, to 0.3% MoM in September from 0.4%, which would maintain the year-overyear rate at a near three-year low of 3.8%.

Overall, the forecasts are not pointing to a game-changing report, but any upside surprise coming on top of decent ISM prints and less-dovish-than-expected commentary by Fed policymakers could very well act as the icing on the cake of a bright week for the U.S. dollar. Wall Street could also cheer potentially strong data, even if it translates into slower rate cuts ahead, as more evidence that the U.S. economy is not heading into recession is nothing but good news.

USD/MYR closed at 4.12 last week as it fell in line with both the broad greenback and USDCNH. Momentum for the pair appears bearish and at this point, it looks akin to catching a falling knife with the investment upcycle. Malaysia remains in pole position to attract investors and that is generating significant support for the MYR. As portfolio inflows build, we still expect further gains in Asia FX including MYR in the coming quarters. However, the pace of MYR gains may slow as short-term flows rotate out to another Asia FX that have lagged the latest run. Furthermore, U.S. elections uncertainties may temper with global risk appetite and USD/MYR may transit into a consolidative pattern in 4Q24. Further out, we think the underlying drivers for MYR to improve further remain, particularly as the Fed eases rates while BNM is expected to keep rates on hold into 2025.That said, we are mindful that lingering concerns about China’s bumpy economic rebound and uncertainties of the November U.S. elections may inject two-way volatility to the expected Asia FX recovery in the near term.

Source: BIMB Securities Research - 30 Sept 2024