Fundamental Overview

▪ The Fed's recent hawkish pause, coupled with the ECB and BoE's dovish bias has helped the USD index (DXY) to maintain a foothold above the 105.0 level, weakening the ringgit. The deepening of negative yield differential between MY-US 10-year bond (above -50 bps) due to the Fed's higher-for-longer narrative has also pressured the MYR to trade close to the 4.70/USD threshold. Malaysia's weaker-than-expected trade figures and China's worsening economic outlook have further contributed to the depreciation.

▪ Even though the Fed continues to indicate the possibility of another 25 bps rate hike this year, the market remains sceptical (the CME FedWatch Tool expects the Fed to maintain rates at 5.50% until June 2024). Therefore, we reckon that, unless there is an upside surprise in US macro readings, the DXY may consolidate around the 105.0 – 105.5 level next week, which would keep the ringgit weak around the 4.65 - 4.70 level. Also, the looming risk of a potential US government shutdown (deadline: September 30) may benefit the USD in the short-run. Of note, we still maintain a bullish outlook for the ringgit's potential recovery in 4Q23 as we factor in more cuts by the Fed in 2024 due to growing headwinds. However, we have revised our end-2023 ringgit forecast to 4.44 from 4.29.

Technical Analysis

▪ The USDMYR outlook is neutral-to-bearish, as its RSI is nearing an overbought zone (See ST Technical table).

▪ Technically, the pair may move towards (S1) 4.685 and test (S2) 4.681, suggesting an upside pattern for the ringgit. However, the pair may test (R2) 4.701 if the market increase USD’s long position.

Source: Kenanga Research - 22 Sept 2023