KUALA LUMPUR (Jan 2): The ringgit could strengthen further to its strongest level in eight years, supported by expectations of deeper US interest rate cuts and improving domestic fundamentals, MARC Ratings said.

By mid-2026, the ringgit could potentially appreciate to 3.93 against the US dollar, as markets are pricing in at least two interest rate cuts by the US Federal Reserve, with a 33%-45% probability of a third, according to the rating agency in a statement.

Such moves would narrow the yield differential — the gap between US and Malaysian interest rates — in Malaysia’s favour, MARC Ratings said. This is because when US rates drop, the greenback typically weakens, making ringgit-denominated assets more attractive to global investors seeking better returns.

The local currency is also expected to benefit from trade initiatives announced at the 47th Asean Summit, which are expected to bolster the current account surplus through stronger exports and reinforce the ringgit's strength, it added.

On the bond market, MARC Ratings said Malaysian Government Securities (MGS) yields are expected to ease due to resilient domestic fundamentals and artificial intelligence (AI)-driven tailwinds. It is projecting yields to consolidate within a fair value range of 3.35%-3.40% as the market transitions into 2026.

Malaysia’s 2026 bond auction calendar is expected to increase to 37 auctions from 36 in 2025. In addition, there will be up to 17 private placements — consistent with 2025's level — that are skewed towards longer-dated maturities, which will help the market absorb the debt more smoothly without causing price volatility.

The rating agency also said portfolio inflows are expected to remain steady, underpinned by a stronger ringgit, low inflation and a fiscal deficit that is projected to narrow to 3.5% of gross domestic product in 2026, from 3.8% in 2025.

Structural tailwinds from the global AI capital expenditure cycle are also expected to support corporate earnings and sustain foreign interest, given Malaysia’s role in the semiconductor supply chain, it added.