Downside Risks To The Local Note Remains Amid China’s Weak Sentiment

Even though the USD index fell by 1.2% on a Thursday-to-Thursday basis, the ringgit still weakened against the greenback, mainly due to the depreciation of the yuan following the unexpected decision by the PBoC to reduce its key short-term policy rates by 10 bps. Additionally, the ringgit faced pressure from Malaysia’s relatively subdued economic sentiment, which was influenced by China’s economic downturn and uncertainty surrounding the direction of US monetary policy following the Fed’s hawkish pause.

According to Kenanga, the ringgit may face continued pressure due to the anticipated further weakening of the yuan, as the PBoC is expected to lower its one-year loan prime rate by 10 bps next week to boost its sputtering economy. However, the ringgit’s depreciation is expected to be limited around the 4.62 – 4.63 level, as the USD Index is likely to hover near the 102.0 level amid a lack of market conviction in the Fed’s recent hawkish guidance (another 50 bps hike by end-2023). That being said, the market may continue to look for signs of US disinflation and slowing economic activity before buying risk assets.

The USDMYR outlook remained neutral for the week ahead, with the pair likely to hover around its 5-day EMA of 4.613 as the pair’s RSI is in the middle of the range. The short-term bias for the pair has remained neutral, the pair is projected to trade in the range of 4.583 – 4.634 next week. However, downside risks to the local note remained amid weak China’s economic prospects and US’ policy uncertainty.