KUALA LUMPUR (Jan 16): Maybank’s foreign exchange (FX) research team estimates that the ringgit is undervalued against the US dollar by 12.2%, signalling potential long-term upside for the local currency.

Supported by undervaluation, fiscal improvements and investment growth, researchers expect the ringgit to strengthen towards 4.45 per dollar by the year-end, followed by 4.20 per dollar by end-2026 and 4.10 per dollar by end-2027, as compared to 4.50 per dollar on Jan 15.

From Nov 4, 2024 to Jan 14, 2025, the ringgit had depreciated by 2.97% against the greenback, outperforming its regional counterparts.

Nevertheless, Maybank believes growth is expected for the ringgit as Bank Negara Malaysia’s (BNM) maintained its overnight policy rate (OPR) at 3%. This decision, unlike other regional banks, has helped provide stability against US yield differentials.

“Data wise, actual foreign direct investments (FDI) for the first nine months of 2024 was RM60 billion by our estimate, which is at the higher end of historical actual annual FDI levels,” said the forex research team.

Therefore, FDI remains a supportive factor for the currency, fuelled by investment in green energy, technology and infrastructure.

With the upcoming rationalisation of RON95 fuel subsidies, the government's budget deficit is expected to come in at 4.0% to 4.1%, compared to the previous 4.3% estimate, boosting investor confidence.

Therefore, researchers anticipate an increase in foreign demand for Malaysian government bonds as the country’s fiscal position strengthens, offsetting negative impacts on emerging market assets.

The FX team, however, warned that the ringgit is exposed to risks associated with Donald Trump’s trade policies due to the US’ high trade dependency.

Sensitivity towards the Chinese yuan volatility remains a concern, though recent stabilisation efforts by the People’s Bank of China have reduced spillover impacts.