Malaysian ringgit outlook in 2024: Not a nightmare
Since our last update in August last year, the Malaysian ringgit (ringgit) continues to trend lower, to the lowest level in 26 years, around 4.80 against US dollar (US dollar).
The weakening ringgit was a result of the floundering economy in China, net domestic bond market outflow and a more hawkish tone by the Fed to keep rates higher for longer.
Year to date, the Malaysian ringgit is one of the worst performers among the major Asian currencies against the US dollar.
At its lowest level, the Malaysian ringgit is nearly two per cent away from reaching 4.8850 per dollar during intraday trading, a level last seen in 1998 when most of the Asian currencies were doomed during the Asian Financial Crisis.
Were we wrong?
Three main reasons for the recent ringgit depreciation.
The hawkish tone from the US’ Federal Reserve
The market is now realising how hawkish is the Federal Reserve (Fed) and has started to reckon with higher-for-longer interest rates.
Against the latest US economic backdrop where the threat of US sticky inflation lingers and economy holds stronger than expected, the Fed’s rhetoric towards monetary policy ahead might be more hawkish than what the market is hoping.
Although the Fed has cited a discussion of a rate cut as ‘into view’ in the previous FOMC meeting, the market seems misinterpreted it into a rate cut as a ‘must’ in 2024. The US Treasury yield came lower in December 2023 in the aftermath of the Fed’s softening tone.
Nevertheless, with more Fed officials commenting on the latest economic development, the market started to accept the fact that it might be too early for a rate cut in 1H24. On account of this, the 10year US Treasury yield went higher in December 2024.
The next scheduled Bank Negara Malaysia decision is on March 7, where they are expected to hold OPR rate at three per cent. On the other hand, the market is expecting the Fed to cut rate by 2H24. We reckon the interest rate parity between US Fed rate and OPR will maintain at current level, however the Fed might release a less hawkish tone given the murky global economic outlook.
From our perspective, the market expectation of rate cuts or any dovish tone released by the Fed will be viewed as a detractor from current US dollar strength, while it will be a catalyst to buoy emerging country currencies including Malaysian ringgit.
Net outflow from the Malaysian debt market
We believe the recent outflow from the ringgit bond space is mainly contributed by elevated UST yield in the corresponding period after hawkish-thanexpected comments from the Fed’s officials.
The change in the Fed’s narrative set a spark in 10-year US Treasury yield to spike from its December 23 lowest 3.79 per cent to 4.23 per cent as of the date of writing.
As a result, foreign investors dumped ringgit bonds in December 2023 and January 2024 after the months of positive inflow in 2023 given the widening UST-MGS yield after the soar in UST yield.
Although the net outflow in the previous two months sounds concerning, the net outflow amount (US$414.9 million) is relatively minor compared to the total net inflow in 2023 (US$3,766.6 million).
To recap, the Fed released a dovish comment to mark the end of the aggressive rate hike cycle during the December 2023 FOMC meeting, and the US Treasury yield was driven down thereafter.
The narrowing UST and MGS yield has translated into a positive inflow into the ringgit bond space, marking a strength in the Malaysian ringgit at its peak of 4.66 in November 2023 and US$713.3 million of foreign net inflow in domestic bonds.