Fitch Solutions Country Risk and Industry Research expects the Malaysian ringgit to trade sideways with an upside bias against the US dollar over the short term and to reach RM4.350/USD by end-2023.
In a note on Thursday (Jan 5), the firm said that technically, the ringgit looks slightly overbought in the near term after it strengthened by more than about 7.7% against the US dollar since its trough in early November, suggesting that a consolidation is likely due.
It said that fundamentally, steeper rate hikes in Malaysia over the coming months and continued current account surpluses, despite a slight deterioration in terms of trade, will likely provide support to the currency.
Over the longer term, the firm holds a neutral view on the ringgit as the unit appears to be undervalued in real effective exchange rate terms, while a relatively strong growth outlook and modest inflation should remain supportive of the currency.
Fitch Solutions said the Malaysian ringgit weakened by about 5.3% in 2022, but it expects greater stability in 2023. It added that while it expects the Malaysian ringgit to consolidate against the US dollar over the very near term, it noted some broader upside bias.
“From a technical perspective, the ringgit is looking slightly overbought after it strengthened sharply against the USD by about 7.7% since its trough in early November, suggesting that further gains in the near term will likely be limited.
“However, we are slightly upbeat on the ringgit for two reasons including the end of the Fed’s rate-hiking cycle and a second, Malaysia’s strong external sector,” it said.
Looking forward, the firm said while it is somewhat downbeat about Malaysia’s goods export outlook due to slowing global economic growth and the semiconductor downcycle, it expects commodity prices to remain above pre-Covid levels and import growth will also slow in tandem, which should support net exports overall.
It said this is because intermediate goods account for about 55% of total imports, while re-exports account for a separate 25.4%.
“Consequently, we expect Malaysia’s current account surplus to remain stable at 1.9% of GDP in 2023 (revised up from 1.1% previously), similar to our revised estimate of 2.0% in 2022,” it said.
Fitch Solutions said looking beyond the six-month horizon, it expects the ringgit strengthen slightly against the US dollar and forecast the ringgit to reach RM4.350/USD by end-2023 with an average of RM4.380/USD for the year.
“The ringgit is looking undervalued in real effective exchange rate terms, trading at about 6.8% below its 10-year moving average. Mean reversion should therefore provide a tailwind for the ringgit,” it said.