KUALA LUMPUR (June 23): The ringgit is expected to trade between the 4.70 and 4.90 range in the second half of 2023 (2H2023) as it continues to underperform against the US dollar and most Southeast Asian currencies, says RHB Investment Bank Bhd.

In a note on Friday (June 23), RHB Investment said it remains cautious on the ringgit's outlook and revised its end-third quarter 2023 (3Q2023) forecast to 4.65-4.75 — from its previous forecast of 4.50-4.60 — with the balance of risks tilted towards a print of 4.75-4.85.

“Our USD/MYR model has been signaling that 4.762 could be hit by 3Q2023 if Bank Negara Malaysia (BNM) doesn’t adopt a hawkish stance in the form of guidance to markets that the overnight policy rate (OPR) needs to rise to much higher levels such as 3.75% (versus the current 3%), and significant fiscal reforms aren’t announced in the next few months,” RHB Investment said.

Without these policy changes, the research house's model shows that the ringgit could reach around 4.88 by end-2023.

"If indeed policymakers do come to the table in the aforementioned form, we would turn less concerned on the currency and USD/MYR could then end up at 4.40-4.50 at end-2023,” it said.

The research house lists several catalysts for the continued depreciation of the ringgit against the US dollar in 2H2023.

The first is the likely increase of the negative carry on holding the ringgit, with BNM being behind the currency market curve amid the backdrop of the US Federal Reserve's federal funds rate or FFR rising to a peak of 5.50-5.75%, with the balance of risks tilted towards 5.75-6.00%. "Markets are pricing in a peak FFR of around 5.34%," it noted.

The second is the rapidly deteriorating domestic sentiment for holding the ringgit, which is reflected in the multi-year low trading volumes in the domestic stock market while foreign exchange deposits in the domestic banking system remain elevated.

The third is the upcoming state elections, with the likely scenario that limited fiscal and structural reforms announced by the federal government will materialise in the next few months.

The fourth is the correlation between the USD/MYR and USD/CNH (USD/Chinese yuan), which is rising and is currently around 74%. "We revise up our USD/CNH end-3Q2023 forecast to 7.25-7.35 from 7.00-7.10 as one of the few policy tools that the People's Bank of China can utilise  to support GDP growth is the exchange rate. For 4Q2023, risks are building that USD/CNH could trade in the 7.30-7.40 range," said RHB Investment.

The last is how some external vulnerability ratios in Malaysia are already flashing red.

Meanwhile, RHB Investment noted that recent BNM and government policy announcements have given little comfort that USD/MYR will stabilise in the near term.

“The resounding view from policymakers and the consensus is that ringgit weakness is mainly due to external factors and temporary. We find limited empirical evidence to support these types of assessments regarding USD/MYR," it said, adding its quantitative approach to modelling USD/MYR, along with having a detailed assessment of the domestic policy environment on a forward looking basis, has helped it in forecasting the path of the currency so far.

"The technical picture suggests that USD/MYR could rise to 4.7695 in the near term, with the resistance level of 4.6375 already having been broken. The technical picture suggests that USD/CNH could rise to around 7.30 in the near term, with the resistance level of 7.1817 already having been broken," it added.