Fundamental Overview

• The ringgit appreciated sharply against the USD, reaching a level not seen in almost a year, with its strongest week-on-week gain (1.9%) since July 2023, primarily due to a weaker greenback. The USD index (DXY) was pressured to trade near the 104.0 level while the 10-year US Treasury (UST) yield trended below 4.00%, narrowing the MGS-UST negative yield differential to 28.1 bps (last week's average: -45.3 bps). Fed Chair Powell's hint at a potential rate cut in September, amid signs of cooling inflation, led to a record RM5.3b in foreign inflows into the Malaysian bond market this week, significantly boosting the ringgit. Additionally, the BoJ's surprise rate hike and hawkish stance further weakened the DXY.

• The limited negative impact on the GBP from the Bank of England's recent rate cut, coupled with continued signs of a US economic slowdown as evidenced by the weak ISM manufacturing index (46.8 vs. Consensus: 48.8), may continue to pressure the DXY downward, potentially strengthening the ringgit to trade well below 4.55/USD. A disappointing non-farm payrolls number and a rise in the unemployment rate could heighten market expectations of multiple Fed rate cuts, reinforcing our soft-USD narrative. With no major catalysts next week, the market may focus on Fed speakers’ tone, geopolitical developments in the Middle East, and domestic macroeconomic readings.

Technical Analysis

• With the USDMYR's RSI in oversold territory, a bullish move toward its 5-day EMA of 4.590 is expected.

• A technical correction may see the pair trade lower against the USD next week, facing immediate resistance at (R1) 4.609.

Source: Kenanga Research - 2 Aug 2024