Fundamental Overview

• While the Fed's preferred inflation measure, the core PCE, has been softening and the disinflation momentum is expected to persist, the recent 0.4% MoM increase in core CPI continues to send a mixed message to the market. This has notably diminished expectations of an early Fed pivot, prompting the market to scale back its pricing from seven to only four 25-basis-point rate cuts for the year, consequently weakening risk assets. The ringgit, in turn, has depreciated to levels above 4.78 against the USD, further exacerbated by sustained foreign outflows in the bond space.

• The downside surprise in US retail sales (-0.8% MoM vs consensus: -0.2%) has marginally contributed to the repricing of Fed rate bets in favour of cuts. The USD has also retraced its post-CPI gains, given that slower consumer spending is a precursor to a deceleration in economic growth, potentially necessitating a rate cut cycle. However, the ringgit may persist in trading weak above the 4.75/USD level due to the absence of domestic catalysts. Today's final 4Q23 GDP release and next week's trade data figures are unlikely to significantly impact the direction of the ringgit. The focus will be on the US FOMC minutes next week, which may continue to signal that the Fed is in no rush to cut, thereby supporting the USD.

Technical Analysis

• The USDMYR is expected to turn neutral-to-bearish next week as its RSI is nearing an overbought position (See ST Technical table).

• Technically, MYR weakness against the USD may reverse should risk sentiment improve, with the pair immediate support awaits at (S1) 4.767. Conversely, the pair may test (R1) 4.790 if DXY trend higher.

Source: Kenanga Research - 16 Feb 2024