The Malaysian Ringgit 

• Who would have thought that the Malaysian Ringgit would accelerate so quickly? The local currency has appreciated faster than expected, bringing it closer to our year-end average target ahead of schedule. Initially, we forecasted the Ringgit to gradually reach the RM4.45- RM4.50 range against the USD by the end of 2024, with an average of RM4.65 per USD. However, that no longer seems to be the case.

• Notably, the Malaysian Ringgit strengthened significantly, appreciating from RM4.5905 per USD at the end of July 2024 to RM4.3205 per USD by the end of August 2024, marking a robust 6.3% MoM gain. We attribute this bullish momentum to increasing market confidence, fuelled by positive developments in Malaysia. For example, the 2Q24 GDP exceeded expectations, growing by 5.9% YoY, surpassing the Department of Statistics’ advance estimate of 5.8% YoY and the original consensus estimate of 4.7%. Additionally, various indicators suggest that the country’s economic performance will remain strong, prompting Bank Negara Malaysia (BNM) to lean towards the upper end of its 4% - 5% growth target for the entire year. Additionally, the US Dollar Index exhibited a decelerating trend throughout the month, declining from 104.017 at the end of July to 101.401 by the end of August, representing a 2.5% MoM drop.

• The steady improvement of the Malaysian Ringgit can also be linked to the Federal Reserve's evolving stance on monetary policy. During his speech at the Jackson Hole Economic Symposium, Federal Reserve Chair Jerome Powell strongly hinted at potential rate cuts. He stated that policy adjustments are now necessary, with the direction being clear. However, the timing and pace of rate cuts will be determined by incoming data, the evolving outlook, and the balance of risks. The FOMC last updated its economic projections in June 2024, and since then, conditions have stabilised. Inflation has cooled further, and unemployment has slightly risen. In July 2024, the US annual inflation rate dipped below 3% for the first time since 2021, easing investor concerns. The decline in inflation, combined with signs of a cooling labour market, has raised expectations that the Federal Reserve may cut interest rates soon. Prices rose at an annual rate of 2.9% YoY in July, while core inflation, excluding volatile food and energy prices, increased by 3.2% over the past year.

• While the FOMC did not cut rates in July meeting, the fact that several policymakers were open to the idea, combined with Powell's more recent Jackson Hole statement, suggests that a rate cut in September 2024 is becoming increasingly likely. However, most policymakers still project one or two rate cuts in 2024, though a minority argue for holding rates steady. With only three scheduled meetings left in 2024 — on September 18th, November 7th, and December 18th — the opportunity for rate cuts is limited. The FOMC is also set to update its economic projections at the upcoming September 18th meeting. Similarly, according to the CME FedWatch Tool, 67% of investors expect a 25-basis-point rate cut in September. Interestingly, 33% of investors are betting on a 50-basis-point rate cut instead, reflecting a more bearish mood.

• In addition to its appreciation against the US dollar, the Malaysian Ringgit exhibited a MoM gain against most of the currencies. The Ringgit experienced the most significant appreciation against the Indian Rupee, with a monthly increase of 6.0%, followed by the Hong Kong Dollar, which increased by 5.7%, and Vietnamese Dong, which increased by 4.5%. Other notable appreciations include the Chinese Renminbi, which increased by 4.1%, and the Euro Dolar, which increased by 4.0%. See Figure 6.

• Taking a broader perspective, the Malaysian ringgit has demonstrated consistent strength in recent weeks. To ensure a stronger average performance, it is essential for the currency to remain below RM4.50 per USD. The Ringgit has averaged RM4.681 per USD over the first eight months of the year (8M24), an improvement from the 7M24 average of RM4.719 per USD. YTD24, the Ringgit has appreciated by 6.3% against the US dollar, outperforming other regional currencies such as the Singapore Dollar (up 1.0% YTD), Thai Baht (up 0.8% YTD), and the Hong Kong Dollar (up 0.2% YTD). See Figure 5.

• Given that the ringgit has already surpassed our expectations, we believe there is still potential for further appreciation in the medium term, particularly if the Federal Reserve proceeds with its anticipated monetary easing. Moreover, Malaysia's stable economic performance (1H24 GDP: 5.1% YoY), improvements in the labour market, the prospect of higher Brent crude oil prices, and a rebound in tourism are all likely to bolster the ringgit's strength. Consequently, we have revised our full-year average upward, expecting sustained trading around current levels and the possibility of it revisiting the RM4.15-RM4.25 range by the end of 2024. In the short term, our analysis indicates that the ringgit may undergo a correction or retracement to RM4.30-RM4.40 per USD. As a result, we now project the ringgit to average RM4.55 per USD for 2024 (Year-to-Date: RM4.681; previous projection: RM4.65).

• For next year, we believe the medium to long-term performance of the Ringgit will largely hinge on government policies and its commitment to maintaining the country’s financial stability. While macroeconomic data will be crucial in supporting the Ringgit, it is essential for the government to demonstrate a strong commitment to economic reforms that drive dynamic results and enhance the profitability of public companies. It is important to recognize that market sentiment plays a significant role in currency performance. At present, we project that the Ringgit’s average for 2025 could range between RM4.00 and RM4.50 per USD, with a midpoint of RM4.25. We will continue to closely monitor the Ringgit's development.

Source: TA Research - 3 Sept 2024