Where is the ringgit heading in 2024?

KUCHING: The Malaysian ringgit, which started off 2023 at 4.40 against the US dollar, has gone through another roller coaster of a year.

After hitting a low of 4.74 right before the 2022 elections, the ringgit had continued to strengthen rapidly in January and managed to appreciate back to 4.24 on January 28 before beginning its descent to a 25-year low of 4.79 in October 24.

Since then, the ringgit has managed to rally moderately and settle in at around a 4.60 to 4.70 as we approach the final days of the year.

From channel checks back in October and early November, this is to be expected as most economists were of the opinion that the ringgit would end up hovering at around the current range by year-end due to a lack of appreciating catalysts in the near-term.

However, for for the year ahead, majority of economists are expecting the ringgit to begin seeing some strength and settle in at a 4.30 to 4.50 level as most believe the ringgit is currently oversold and undervalued.

Sharing a similar forecast, Rakuten Head of Research Kenny Yee guided that he believes that Ringgit will rally against the dollar moderately in the coming year as US interest rates are expected to ease while foreign investments begin to flow back into the country.

He pointed out that the recent weakness of the Ringgit against the US dollar in the past year or so is not an isolated incident as many regional Asian currencies as well as global currencies have all weakened against the USD due to the aggressive interest rate hikes that the US Federal Reserve (US Fed) has taken.

As such, he guides that the strengthening of the Ringgit to US dollar in 2024 would be highly dependent on the quantum of the easing of US Fed Fund Rate (FFR) which many industry analysts anticipate will begin in 2024.

And should the US Fed end up aggressively reducing their rates like what they have done in increasing it, Yee guides that he does not discount the possibility of the Ringgit appreciating further.

“Don’t forget, the FFR has increased from 0 per cent to currently 5.5 per cent, so there is ample room for them to reduce. But I wouldn’t bet on it, so that’s why we’d rather be more conservative with a RM4.40 to RM4.50 forecast at the moment for next year,” he shared during a first quarter of financial year 2024 (1QFY24) market outlook session for members of the media.

 

US FOMC: Rate cuts expected in 2024

The most recent US Fed Open Market Committee (FOMC) meeting held earlier this week has left most economists unsurprised as the committee unanimously left its policy rate unchanged at 5.25 to 5.50 per cent for the third straight meeting since Aug.

While most analysts had correctly predicted that the current status quo would be maintained, the committee’s policy statement also acknowledged that “inflation has eased over the past year” and that they would be closely monitoring the economy to determine if “any” additional policy firming would be appropriate.

According to the research arm of Kenanga Investment Bank Bhd (Kenanga Research), this suggests that after a period of aggressive tightening and a bias towards moving rate higher, the US Fed may not need to implement “any” more rate hikes.

Additionally, the US Fed Chair Jerome Powell had also guided in a press conference that the inclusion of the word “any” in the statement reflected a view that the policy rate was “likely at or near its peak for this tightening cycle”.

He also reiterated that the US Fed would be committed to proceeding “carefully” with future rate decisions and that there had been “real progress” on beating back inflation.

Note that US inflation rates had peaked to a multi-year high of 9.1 per cent back in June 2022 before coming down to 3.1 per cent in Nov 2023 which while commendable is slightly higher than its pre-pandemic 2017 to 2019 annual average of 2.1 per cent.

Additionally, the research arm guided that the dot plots highlights indicated that the benchmark rate for FFR rates in 2024 would end at 4.50 to 4.75 per cent which suggests three rate cuts in 2024.

While this is in-line with market consensus, Kenanga Research noted it implies fewer rate cuts than what the market have priced in as the market consensus based on CME Group 30-Day Fed Fund futures prices is suggesting up to five rate cuts to 4.0 per cent by the end of 2024.

“This in a way suggests that the Fed is moving closer to easing and tilting towards dovish from a hawkish stance,” Kenanga Research explained.

“The dot plot also showed expectations for rates to fall even lower in 2025, with most officials expect rates to settle between 3.50 and 3.75 per cent,” they added.

Immediately after announcement by the FOMC, US 10-year treasury yield went down 11 basis points to 3.922 per cent, breaking below the 4.0 per cent mark for the first time since August.

According to Bank Muamalat Malaysia Bhd Chief Economist Dr Mohd Afzanizam Abdul Rashid, this clear guidance by FOMC would suggest that markets would continue to fall back on the rate cut thesis for their near-term trading strategy.

He added that this is also suggestive that emerging market currencies like the Ringgit would likely to be positive in the immediate term.

 

Why has the ringgit weakened in 2023?

While there are a multitude of factors than can affect the valuation of a currency, such as political instability, risk aversion among investors, and poor economic fundamentals all of which Malaysia has struggled with; the most commonly given explanation by analysts towards the weak Ringgit in 2023 is interest rate differentials.

Specifically, many industry analysts like Kenny Yee of Rakuten Trade Sdn Bhd (Rakuten) believe that the aggressive interest rate hikes that the US Federal Reserve (US Fed) has taken since 2022 has been a large contributor to the weakness of the Ringgit.

After keeping the US Fed Fund Rate (FFR) below 0.1 per cent for the bulk of the pandemic era (2020-2021), the US Fed had begun steadily increasing the FFR starting from early 2022 until it finally peaked to 5.33 per cent back in Aug where it has since held steady.

Elsewhere, other major central banks like the European Central Bank and the Central Bank of England have also deployed consecutive hikes since the start of 2022 after keeping their rates close to 0 per cent during the pandemic to their current heights of 4.0 and 5.25 per cent, respectively.

In contrast, Bank Negara Malaysia (BNM) had kept our overnight policy rate (OPR) rather tame throughout the recent years, cutting down only to 1.75 per cent during the pandemic before gradually increasing to our current 3.0 per cent which has not exceeded pre-pandemic levels.

Arguably, these consecutive rate increases other central banks have undertaken for the past two years have attracted many investors and funds to divest from Asian stocks and bonds and instead park themselves in higher yield more attractive waters, causing many currencies in the region to feel weakness.

In particular, the Japanese yen which like the Ringgit deploys a free float system and whose central bank has maintained negative interest rates since 2016 has depreciated against the US dollar by 7.83 per cent year to date at time of writing while the ringgit has depreciated by 5.6 per cent (YTD).

Other floating and or ‘managed float’ currencies in the region also saw YTD weakness against the greenback, albeit less than the ringgit and Japanese yen as a good portion have managed to rally back in the final two months of the year.

For example, the Chinese yuan, Australian dollar, Thai baht, Indian rupee and Taiwan dollar have all weakened against the US dollar YTD by 2.99, 1.5, 0.80, 0.69, and 1.88 per cent, respectively.

But with most major central banks around the world guiding for easing and rate cuts in 2024, the Ringgit alongside other Asian currencies should expect to see some optimism in the coming year.

 

Eye on inflow of foreign funds in 2024 and beyond

Besides being dependant on the FFR, Rakuten Trade’s Yee added that the inflow of foreign funds and investment would also be a key determinant for the strengthening of the ringgit in 2024.

Coinciding with the weakening of the ringgit, he guided that Malaysian equities on Bursa Malaysia saw a massive foreign fund net outflow of RM4.2 billion during the first six months or first half of the year (1H23).

Most economists at the time were expecting a better 2H23 of foreign fund inflow but expectations were hindered by a handful of headwinds.

“The second half started rather well until October where we had to endure numerous headwinds like the sell-down of US bonds, the Middle East war and then subsequently, in November, the downgrade on US sovereign rating,” Yee shared.

Regardless, Yee opined that December’s foreign funds for Malaysian equities on Bursa will end with an inflow an inflow and moving into 2024.

He is confident that there will be an advent of foreign funds coming back into the FBM KLCI with foreign shareholding easily surpassing the 20 per cent threshold after it dipped to 19 per cent back in November.

“Despite the lacklustre performance of the Asian market, I remain adamant that foreign investors will be back to Asia,” he asserted.

“Apart from China’s silence on its recovery and the ongoing wars, we may have to endure the US ’bull-bear’ debate on inflation or recession,” he further added.

He explained that as US equities have touched their valuation ceiling, he believes that foreign investors can no longer ignore the Asian market moving forward.

“I think most evidently, it is worthwhile to note that Wall Street may have outpaced the fundamentals and so in this sense, we can expect some fund managers to look to diversify elsewhere and the funds will hopefully begin returning back to Asia,” he shared.

The sentiment was shared by analysts at RAM Rating Services Bhd (RAM Ratings) who noted that for government bonds, foreign investors had already turned to net purchasers back in November after three consecutive months of net selling.

In their bond market monthly report, the ratings agency guided that foreign funds for Malaysian government securities (MGS) and government investment issues (GII) had increased from a net outflow of RM2.6 billion in Oct to a net inflow of RM5.4 billion in November.

They opined that the rebound in investor appetite for emerging market bonds were fuelled by growing bets that major global central banks such as the US Fed had peaked on their rates and would be cutting rates in the first half of 2024.

Based on data from MIDF Research’s Fund Flow Report on December 8, cumulative foreign fund net outflow on Bursa Malaysia sits at RM603.5 million. However, data from UOB Global Economics and Markets Research indicates that at the end of October, total foreign fund inflows including govt bonds sat at RM16.1 billion.

For its 2023 KLCI year-end target, Rakuten adjusted their previous forecast of 1560 downwards slightly to 1510 based on 16-fold price earnings ratio (PER). And for 2024, the analyst expects the KLCI to hover around the 1590 mark and possibly test the 1650 level by year-end in their best-case scenario.

Meanwhile, analysts at AmInvestment Bank Bhd (AmInvestment Bank) have guided that their base case 2024-end KLCI target to be 1545 pegged to a 14.9-fold PER.

For their worst-case scenario which includes a global recession, new pandemic-driven lockdowns, more US rate hike surprises, bank failures and worsening geopolitical conflicts, they anticipate the KLCI target to fall to 1,315.

Meanwhile, for their best-case scenario that includes an abrupt US Fed policy reversal rather than the soft landing they have recently guided and better than expected global economic growth, they anticipate the KLCI to test 1,655 levels.

As for foreign direct investment (FDI), Yee acknowledged that there has been a lot of good news from Prime Minister Datuk Seri Anwar Ibrahim regarding prominent global names and organisations interested in Malaysia and should those investments materialise in 2024, he reckons that it may lend further strength to the Ringgit.

For now, the Malaysia Investment Development Agency (MIDA) has announced that Malaysia has attracted RM225 billion worth of approved investments in the first nine months of 2023 (9M23) which has exceeded its full-year target. And of that amount, FDIs accounted for 55.9 per cent of the total.

And when asked whether the newly reshuffled cabinet would impact the Ringgit negatively or positively, Yee guided that it is still early days to make any assumptions or forecasts and that we should give them (Federal Government) more time to see what will happen.

“With a renewed optimism in the US market on Fed’s dovish pivot and the possibility of averting a hard-landing next year, it could provide some level of comfort to BNM to retain its policy stance for longer.