The ringgit could recover towards the RM4.04–RM4.06 per US dollar range if the US Federal Reserve keeps interest rates unchanged next week, as expected by Kenanga Research, which believes current market expectations for another rate hike may be overstretched.
The ringgit closed Thursday at RM4.065 against the US dollar, weakening from RM4.045 last Friday and making it one of the weaker-performing emerging-market currencies during the week. It touched RM4.070 on Wednesday.
Kenanga said the weakness appeared to reflect domestic repricing rather than foreign selling, given that Malaysia recorded record bond inflows of RM15.9 billion in August.
Global currency markets were meanwhile influenced by a sharp appreciation in the Japanese yen, with USD/JPY falling below 155 as expectations of monetary tightening by the Bank of Japan (BoJ) strengthened alongside speculation over capital repatriation by Japan’s Government Pension Investment Fund.
At the same time, geopolitical developments around the Bab el-Mandeb Strait pushed Brent crude above US$100 per barrel, adding another layer of uncertainty to inflation and monetary policy expectations.
A smaller-than-expected US Treasury buyback also helped the dollar rebound on Wednesday, contributing to the ringgit’s slide to RM4.070.
Kenanga said the latest US August consumer price index reading would be the most important near-term catalyst for the ringgit.
It expects a monthly core inflation reading of 0.2% or lower to strengthen the case for the Fed to leave interest rates unchanged at its upcoming policy meeting.
The latest US producer price data already leaned in that direction, with core PPI rising 0.2% month-on-month, below market expectations of 0.3%.
However, positioning remains heavily tilted towards another rate increase.
Kenanga noted that futures markets were pricing in more than a 70% probability of a 25-basis-point Fed hike, while fewer than one-fifth of respondents in a Bloomberg survey expected an increase.
The research house said this divergence between market pricing and economists’ expectations represents the main source of near-term volatility for the ringgit.
Kenanga expects the Fed to hold rates next week, followed by its first rate cut only in the second quarter of 2027.
Should the Fed stay on hold, the research house expects much of the current rate-hike premium to unwind, reducing the US dollar’s yield advantage and easing pressure on the ringgit.
“An in-line core reading opens 4.040–4.060, while broadening services inflation would expose 4.080,” Kenanga said.
Kenanga is also maintaining its expectation that the Bank of Japan will raise rates by 25 basis points, with tightening expectations having already contributed to the yen’s recent rally.
While a firmer yen has altered regional currency dynamics, the ringgit has underperformed several peers despite substantial foreign inflows into Malaysian bonds.
On commodities, Kenanga expects escalating tensions in the Red Sea to keep Brent crude above US$100 per barrel, although it does not currently expect the increase in energy prices to generate a broader inflation shock.
From a technical perspective, Kenanga said USD/MYR appears overbought and has extended above its five-day exponential moving average of RM4.064.
The research house therefore favours a degree of mean reversion, placing immediate support for USD/MYR at 4.056 and resistance at 4.084.
Overall, Kenanga believes the risk of further ringgit weakness remains closely tied to US inflation and Fed expectations, but sees scope for the currency to strengthen should the central bank refrain from delivering the rate increase currently priced aggressively into financial markets.
