Maybank Investment Bank has covered USD/MYR in its FX Research & Strategy report for October 2022. The USD/MYR reached a new peak of 4.6495 on 29 Sep as dollar strength continued amid concerns emanating out of UK and market volatility intensified. Since then the pair has retraced and remained around 4.60-4.65 range. The research house expects MYR to remain under pressure over the next few months as long as USD remains supported amid global growth concerns, CNY weakness and with BNM still catching up on the rate hike cycle.
In addition, softer oil prices and expectations of upcoming domestic elections coming closer are expected to add further pressure on the MYR. The extended weakness in the CNY towards the 7.25 mark on 28 Sep on the back of FX volatility which emanated from GBP and EUR sharp declines also helped push riskier currencies lower. The research house’s view on USD is that USD/MYR will continue to be slightly supported and to reflect this it has revised the pair higher for the next 3-6 months.
Malaysia’s external trade outlook is still a “battle” between the ongoing commodity price support and the downside of global economic outlook amid Russia-Ukraine war, US monetary tightening and China growth developments. Risks of fallouts from Russia-Ukraine war (especially on Europe), US-led global monetary policy tightening and China’s lockdowns are clouding global economic – hence trade – outlook. Thus far, Malaysia is benefitting from commodity and tech exports. Palm oil, LNG and crude oil contributed to 23% of 5M 2022’s +23.5% exports growth, with E&E accounted for another 48%.
In summary, MYR weakness was largely driven by exogenous factors, including the sharp rise in UST yields, USD strength, sharp and continued decline in CNH (of which MYR has a strong correlation to), IMF’s downgrade of global growth, risks of China slowdown amid extended lockdowns and ongoing war in Ukraine (sentiment, China proxy play). These concerns may ease at times but have remained elevated and increased particularly in Sep – and concerns about global growth and risk aversion in Oct will continue to support USD and raise cautious view of risky assets for the next few months or so, which may keep MYR testing the 4.65 level and/or remain ranged bound around 4.60-4.70 range.
Meanwhile, Bank Negara made a press release (on September 23) on the ringgit – highlighting that it continues to closely monitor and ensure orderly financial market conditions amidst external developments that have led to persistent strength in the US dollar against almost all currencies, including the ringgit. The US dollar has strengthened significantly due to aggressive monetary policy tightening in the US.
BNM also said that the tighter global financial conditions and higher volatility in the foreign exchange markets are not expected to derail Malaysia’s economic growth and that the foreign exchange market continues to function and intermediate effectively. Daily onshore FX transaction volume has been increasing throughout, reaching a current average of USD13.3 billion against USD11.3 billion in 2021, amid two-way flows. Bond market activity remains healthy, well supported by institutional investors and financial institutions. BNM’s market operations will ensure sufficient liquidity and orderly functioning of financial markets. The press release also indicates a statement by the governor that rather than resorting to capital controls or re-pegging of the ringgit, the policy priority now is to sustain economic growth in an environment of price stability and to further strengthen domestic economic fundamentals through structural reforms – for a more enduring ringgit.
Growth and Inflation Outlook: Maybank IB economics team expect another quarter strong YoY growth in 3Q 2022, partly reflecting the low base effect in 3Q 2021 when the economy shrank -4.5% YoY following another round of lockdown back then. However, the environment of rising inflation and interest rates domestically and globally; the outlook of slower global economic growth; and the unwinding/withdrawal of domestic stimulus measures put in place during the pandemic (e.g. the end of Sales tax exemption for passenger car sales and the options for lower workers’ EPF contribution of 9% (back to 11%) after 30 June 2022; the expected fuel subsidy rationalization in 2023) will result in slower growth in 4Q 2022 and 2023. Therefore, the research house maintains growth forecasts of +6.0% for this year and +4.0% for next year (1H 2022: +6.9%; 2021: +3.1%), and also expect BNM to proceed with “gradual and measured” OPR increases, penciling in another +50bps hikes to reach 3.00% by 1Q 2023 from current 2.50%.
Technical Outlook: Pair was last seen near 4.65-levels, continuing to trend higher for most of Sep. On technicals, momentum on daily chart is still bullish. While overbought RSI suggests chance for intermittent pullback lower, we note that uptrend since May remains largely intact, and any pullback lower could be modest in extent for now. USDMYR could still remain buoyant near-term. Support at 4.5540 (21-DMA), 4.5010 (50-DMA), 4.4540 (100-DMA). Resistance nearby at 4.65, before
4.70.
