Malaysia's currency rally not over yet as analysts eye rate cuts
Analysts are now focusing on the potential benefits of lower domestic rates, with currency sentiment further buoyed by government structural reforms that may support long-term growth. Expectations for a stronger ringgit also hinge on sustained foreign inflows and the government's 'commitment to follow through on fiscal consolidation', said Christopher Wong, executive director and foreign-exchange strategist at OCBC. His bank projects another rate cut by Malaysia's central bank later this year. Global funds poured a record US$4.3 billion into Malaysia's bonds in the second quarter, betting the last rate-cut holdout central bank in South-east Asia would lower rates, a move BNM delivered with a 25-basis-point reduction in July. Prospects of looser US monetary policy and a weaker US dollar may also stoke demand for Malaysia's sovereign debt. Risks remain despite Malaysia securing a reduction in the US reciprocal tariff rate to 19 per cent from a threatened 25 per cent. Some analysts warn that global trade volatility could still weigh on the currency. 'The prolonging of the trade uncertainty, and the lingering possibility that the tariffs land higher than current levels', presents a sizeable risk for Malaysian businesses, said Matthew Ryan, head of market strategy at Ebury Partners. In this scenario, 'we would expect a moderate hit to Malaysia's economy, and a more pronounced sell-off in the ringgit,' he said. Prime Minister Anwar Ibrahim unveiled an ambitious five-year plan to boost growth to 2030, alongside a one-time RM2.8 billion (S$855 million) stimulus with cash handouts and lower fuel prices. But the government has also made attempts to rein in fiscal largesse, including cutting diesel subsidies and expanding the sales and service tax. These measures, combined with contained inflation, 'which could give rise to market expectations for further BNM policy easing', are seen as a key pillar for the ringgit's strength, according to Lloyd Chan, a currency strategist at MUFG, who expects the currency to reach 4.15 by year-end. 'What stands out for the ringgit is the ongoing government-led structural reforms aimed at boosting productivity and enhancing fiscal discipline, which should provide enduring support for the currency,' he said. The ringgit closed at 4.2120 on Friday. BLOOMBERG
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