The ringgit strengthened sharply against the US dollar, rising to RM4.045 from RM4.086 last Friday, as concerns over US fiscal strains and softer expectations for Federal Reserve policy weighed on the greenback, according to Kenanga.
Kenanga said the US dollar’s direction is increasingly being driven by fiscal concerns rather than expectations of a more hawkish Federal Reserve.
US government debt has crossed US$40 trillion, while long-term Treasury yields breached 5.30%, prompting an unscheduled Treasury buyback. The subsequent decline in yields supported the ringgit’s rally to RM4.045 against the US dollar.
Meanwhile, softer US retail sales, inflation and employment data have reduced market expectations for a September interest rate hike by the Federal Reserve.
However, minutes from the Federal Open Market Committee (FOMC) indicated that a rate hike had not been completely ruled out.
Kenanga said investors had also rotated into high-beta and carry trades, leaving US dollar positioning defensive ahead of the Jackson Hole symposium.
Looking ahead, Kenanga said the US economic calendar remains relatively light, with core personal consumption expenditure (PCE) inflation data being the key release ahead of Jackson Hole.
The market will be watching for greater clarity on the Federal Reserve’s September policy stance from Fed Chair Warsh, following three dissenting votes in July.
Kenanga also highlighted the potential impact of US-Iran tensions on currencies and oil prices.
Bessent is expected to provide details of Washington’s economic campaign against Iran, targeting Tehran as well as countries supplying it.
Any escalation could push Brent crude prices towards US$100 a barrel, potentially reviving demand for the US dollar and putting pressure on emerging-market currencies, including the ringgit.
With little domestic economic data scheduled, Kenanga said the ringgit is likely to remain sensitive to external developments and geopolitical headlines.
Despite its recent strength, Kenanga expects the Federal Reserve to keep interest rates unchanged in September and does not expect US-Iran tensions to result in a sustained oil price shock.
The research house said Treasury vigilance at the long end of the yield curve should help compress fiscal risk premiums, limiting upward pressure on US yields and the US dollar.
It therefore recommends maintaining carry positions in emerging-market currencies.
However, the ringgit’s sharp appreciation and technically oversold conditions could trigger some profit-taking, particularly if the Federal Reserve delivers less dovish guidance.
Kenanga expects US dollar-ringgit (USDMYR) to trade within RM4.04 to RM4.06, with an early corrective rebound possible before the ringgit resumes its strengthening trend.
A sustained break above RM4.06 would likely require an escalation in tensions involving Iran, it said.
From a technical perspective, USDMYR has turned bearish below its five-day exponential moving average resistance at RM4.055, while its seven-day Relative Strength Index (RSI-7) reading of 12.59 indicates deeply oversold conditions.
Immediate support is seen at RM4.040.
