KUALA LUMPUR (Sept 8): The ringgit is expected to recover and appreciate to 4.24 against the US dollar by the end of 2023, supported by reversal of fund flows into riskier markets, said MIDF Research.

"We foresee the ringgit performing better in the latter part of the year, as expectations for a hawkish Fed (US Federal Reserve) subsides and China's recovery picks up again, supported by stimulus measures, including the recent 10 basis points cut by (China's central bank) for the one-year loan prime rate,"  the research house said in its monthly currency review on Friday.

“We foresee the ringgit to end the year around RM4.24, and averaging at RM4.43 for the full year 2023 (year-to-date average: RM4.49),”  it added.

MIDF said the ringgit ended lower by 2.8% month-on-month (m-o-m) in August to RM4.639, as a result of the stronger dollar.

“Nevertheless, the ringgit depreciated at a much smaller margin of 0.5% m-o-m to RM4.589 based on the monthly average, fairing better than regional currencies,” it said.

MIDF said that apart from the greenback's strength, the performance of the ringgit and other regional currencies was also dragged down by China's lacklustre economic recovery, with manufacturing and trade continuing to remain sluggish.

"Moreover, renewed concerns over China's real estate crisis also caused regional currencies to weaken," it said.

MIDF said the overall weakness of the ringgit at the end of August was due to relatively sharper fall related to concerns over exposure to China's real estate crisis.

"Although Malaysia's banking system has exposure to the local subsidiary of Country Garden, China's struggling major property developer, which caused ringgit to be more susceptible to the slowdown in China's property market, Bank Negara Malaysia (BNM) indicated the exposure is rather limited, amounting to less than 0.1% of outstanding banking system loans and bonds as of June," it said.

MIDF also foresees that differences in interest rates will not exert pressure to draw more funds into the US market, saying the Fed will keep its funds rate unchanged at 5.25% to 5.5%, while BNM will maintain the overnight policy rate (OPR) at 3% for the rest of the year.

“In other words, we expect there will be rebalancing of fund flows to other parts of the world, including Malaysia,” it said.

MIDF said it maintains a bullish view on the local currency, as it anticipates that expectations for the Fed to stay hawkish will subside in the later part of the year, and further supported by the positive fundamentals in Malaysia's domestic economic conditions and continued current account surplus.

The possible boost to the external trade outlook and renewed pick-up in China's economic recovery would also be positive for the ringgit, it said.

“While we expect the ringgit to appreciate later this year, there is weakening bias as the Fed has yet to declare the end of its tightening cycle and concerns over China’s growth prospect,” it noted.

Year-to-date (YTD), the ringgit depreciated by 5% against the US dollar, sharper than most other currencies except for the yen, which depreciated by 9.9%, MIDF said.

“Similar to the ringgit, regional currencies also weakened this year, on the back of the strength in the US dollar. In contrast, the Indonesian rupiah is the best-performing regional currency, with an appreciation of 2.3% YTD so far this year,” it said.

In line with the ringgit depreciation, the FBM KLCI ended 0.5% m-o-m lower at 1,451.94, while the yield for the benchmark Malaysian Government Securities (MGS) 10 rose by one basis point (bps) to 3.84%.

"The monthly average, however, saw FBM KCLI rise 2.8% m-o-m to 1450.71, while the MGS yield rose by one bps to 3.85%. Meanwhile, foreign holdings of Malaysian bonds reached an all-time high in July 2023 at RM279 billion," it said.

MIDF said that Malaysia's foreign holdings of government bonds stood at RM207 billion, which accounted for 24% of the total outstanding government bonds and the highest in 14 months, surpassing the pre-pandemic average of 23.1% in 2019.