BNM’s decision will affect the fate of the Malaysian ringgit this week

Kuala Lumpur, Malaysia – Media Outreach – 9 March 2023 – Over the past year, the Malaysian ringgit (MYR) has been one of the most resilient of the top 10 Asian currencies that we track. As the Federal Reserve (Fed) began tightening monetary policy in March last year to rein in inflation, risk-sensitive currencies began to decline. however, MYR It has lost only 6.5% over the past 12 months, outperforming even global majors such as the Japanese yen and the Australian dollar, which have depreciated by 15% and 7.7% respectively (see chart below).

Source: OctaFX calculations based on open-source information

However, things started to turn bad in February. In the last one month, MYR It has been the worst performing currency among the 10 major Asian currencies we track (see chart below). In fact, MYR rose above all major moving averages and closed at 4.4730 against the US Dollar (usd) hit a new three-month high on Friday. Meanwhile, the ringgit also traded mostly lower against its Asian counterpart. It depreciated against the Singapore dollar (SGD) fell against the Thai baht at 3.3255/3269 from 3.3210/3252 set on Thursday (THB) to 12.8998/9105 from 12.8583/8789 earlier, and depreciated against the Philippine peso (PHP) from 8.16/8.17 to 8.13/8.14.

MYR 2 - Monthly Change.jpg

Source: OctaFX calculations based on open-source information

The final reason for the general decline in most Asian currencies is essentially the same. Investors turned bearish on riskier assets such as emerging market debt after the Fed signaled it would continue raising interest rates for a long time. Rising US Treasury yields due to the Fed’s hawkish stance on monetary policy are making riskier assets less attractive.

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poor performance relative to MYR The comparison to other Asian currencies can mainly be attributed to the fact that Bank Negara Malaysia (BNM) has been quite cautious in its approach to monetary policy during the current tightening cycle,’ said Kar Yong, a financial markets analyst at OctaFX. Aang explained.

Indeed, BNM has only raised rates by 100 basis points since May and its benchmark interest rate, which currently stands at 2.75%, is still the lowest in the sector. The last hike was in November last year and since then Malaysian monetary policy tightening has essentially remained on hold. Thus, the divergence between the US and Malaysian monetary policies widened, leading to downward pressure MYR,

This week should be decisive for the MYR as the BNM’s Monetary Policy Committee will meet on March 9 to decide on the overnight policy rate. The market expects BNM to keep rates unchanged, but a surprise surprise is quite likely, in our opinion. Two factors are making a rate hike more likely this time around:

    1. no signs of recession, China, one of Malaysia’s top trading partners, has recently seen very strong growth in its manufacturing and service sectors. China’s manufacturing activity grew at the fastest pace in more than a decade in February 2023, according to the NBS Purchasing Managers’ Index (PMI), as output ramped up after the lifting of COVID-19 restrictions late last year. In addition, a private survey showed that China’s services PMI reached 55 in February, indicating a more vigorous expansion in this sector.
    2. Fed stays aggressive, Traders are now pricing in at least three more 25-basis point rate (bps) hikes from the Fed this year, with rates peaking at 5.43% by September. In other words, the Fed is all but certain to raise rates at its next meeting on March 22.
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On balance, the Malaysian economy is strong and will likely continue to expand into 2023. In general, the economy of the Asia Pacific region is projected to grow by 3.1% in gross domestic product (GDP) this year. According to a new report published by the Asia-Pacific Economic Cooperation (APEC) Policy Support Unit. MYRThe , which has already devalued by more than 5% since late January, will increase aggregate demand in the Malaysian economy and fuel inflation. Furthermore, rising interest rates in the US will continue to weigh on investor sentiment in emerging markets.

‘It seems prudent for BNM to raise rates in advance to offset the negative impact of a hawkish Fed. While it is extremely difficult to forecast future changes in interest rates, I believe BNM will take a forward-looking approach and hike rates by 25 bps this week. Furthermore, there are signs that the market itself is bracing for further rate hikes as the yield on the Malaysian 3-year government bond rose to 3.465%, the highest it has been in more than two months,’ OctaFX experts Gero Azrul commented.

If BNM hikes rates on March 9, MYR will appreciate and USDMYR The exchange rate will probably move towards 4.400 and possibly lower. Alternatively, if BNM decides to leave rates unchanged, USDMYR will continue to trade in a sideways mode with a slight bullish bias, targeting 4.500.

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