KUALA LUMPUR: A year-end rally for the ringgit to as much as 4.30 versus the US dollar may be in the offing as a result of positive economic indicators and investor confidence.
Excluding Tuesday, the ringgit continued its upward momentum for the third consecutive day, breaking away from its lowest point in 25 years of 4.79 last week.
The surge was fuelled by the belief that the US interest rate hikes for the year had concluded, economists said.
On Monday, the ringgit surged to 4.6340/6400 against the US dollar, compared to the previous week's closing rate of 4.7265/7320.
SPI Asset Management managing director Stephen Innes said the Federal Open Market Committee (FOMC) meeting early this week was marginally dovish but important for foreign exchange traders, as its chairman Jerome Powell signalled that the Fed did not perceive an immediate need to raise rates solely based on robust economic data.
Innes said the ringgit is very much oversold, and the latest move in US yields, especially if yields fall further, could continue to tip the scales and cause local exporters to sell their US dollar hoards en masse.
He expects the ringgit-US dollar pair to be trading between 4.55 and 4.60 by the year end.
"So, if the Fed is not going to hike on solid data and inflation is sliding down the mountain, this helps explain why the dollar sold post-FOMC.
"In other words, the market is now convinced the Fed will not be hiking again, so with rate hikes getting priced out of December and January, the local currency has improved from an interest rate differential perspective.
"Locally, this eases a lot of pressure on Bank Negara Malaysia and should allow them to eventually gear policy to stimulate the economy," he told Business Times.
MIDF Research expects the ringgit to strengthen to the RM4.30 level by the end of this year.
This aligns with the firm's expectation that the currencies of rapidly developing nations will strengthen as the US interest rates approach their peak, followed by a re-entry of funds into the risk markets.
It added that alongside the overnight policy rate (OPR) maintained at three per cent into 2024, the ringgit will also benefit due to no increase in the spread between the Federal Funds Rate (FFR) and OPR.
Additionally, the overall economic fundamentals continue to support the ringgit in a resilient domestic economic scenario with controlled inflation.
Meanwhile, Innes said China may eventually recover, but there is no clear evidence of that occurring right now, with the Purchasing Managers' Index all hanging around 50.
He added that there was a noticeable drop in foreign direct investment last month, suggesting Western investors are de-risking China assets.
On whether the ringgit rally is due to Bank Negara's intervention, Innes said he was not aware of any recent intervention over the last few days, as most of the dollar sell-off can be attributed to a less hawkish Fed, lower long-dated US real yields, and cooling US economic data.
Bank Muamalat Malaysia Bhd chief economist and social finance head Mohd Afzanizam Abdul Rashid expects the local note to strengthen this week after being in an oversold position for some time and is likely to move positively today, towards the level of 4.70 against the US dollar.
He said the recent rally was very much to do with the FOMC decision to keep the Fed Fund Rate steady at 5.50 per cent and the recent data point that shows the US labour market is softening.
This supported the value of other emerging currencies, including the ringgit, as there is anticipation that a rate cut might occur next year.
"I think the rally is quite genuine as the value of ringgit has always been influenced by the external sector namely the US monetary policy.
"However, the journey towards further appreciation will never be a straight line as there will be speed bumps along the way such as concerns over geo political risks. Therefore, to ensure ringgit will continue to strengthen, the economic reforms has to come into play," he added.
Afzanizam said in this way, foreign investors will reassess their position on Malaysia and might be inclined to invest more if they see value in our financial assets.
"I suppose fiscal reforms will be the key driver, as this will allow the government's financial position to be resilient and able to support the country's economic growth through higher development spending," he noted.
Afzanizam also said the interest rates in the United States are nearing the peak of their cycle, partly driven by the weaker-than-expected Non-Farm Payrolls (NFP) report.
The NFP, which is a measure of job income in the US, increased at a slower rate to 150,000 in October, suggesting that the interest rate hike cycle is getting closer to its end.