(Bloomberg) -- The Malaysian ringgit erased losses for the year, bolstered by stronger growth and expectations of an impending interest rate cut by the Federal Reserve.
The local currency rose 0.6% to 4.5922 against the dollar late Wednesday. The ringgit gained for an eighth day, set for its best run since November 2019.
After falling to a 26-year low in February, the Malaysian currency has done a complete turnaround to become Asia’s best performer this year. Bank Negara Malaysia has encouraged state-linked firms to repatriate and convert foreign income and used forwards to support the currency. An upturn in the global technology cycle is also aiding export recovery, while a record discount to the US should narrow once the Fed eases policy.
“We look for the ringgit to recover some lost ground when yield differential dynamics further improve as the Fed gets closer to embarking on a rate cut,” said Christopher Wong, a foreign exchange strategist at Oversea-Chinese Banking Corp. Foreign inflows into local shares, sustained recovery in the semiconductor cycle and an eventual recovery in the Chinese economy offer further support, he added.
Malaysia’s largest state pension fund, Kumpulan Wang Persaraan Diperbadankan, or KWAP, said on Wednesday it is pausing its plan to invest more abroad as the central bank urges state firms to help support the local currency.
Given the recent pressure on the ringgit, “we decided to have a relook at how we split our deployment outside of Malaysia,” said Chief Investment Officer Hazman Hilmi Salahuddin.
With US swaps pricing a full quarter-point cut by September, an eventual Fed rate cut will buoy the local currency by making it relatively more attractive for dollar-based investors to buy ringgit-denominated assets. Malaysia’s policy rate is currently at 250 basis points below the upper bound of the Fed fund rate.
The ringgit raced ahead of its emerging Asia peers as exports returned to positive territory in the three months ended June. This comes after overseas shipments contracted in 12 out of 13 straight months amid weak demand from China, the nation’s largest trading partner.
Analysts expect Malaysia’s economy to continue its growth momentum after second-quarter gross domestic product beat all estimates. That would allow the central bank to keep borrowing cost steady and offer support for the ringgit as developed countries are poised to cut rates.
(Updates ringgit erasing losses in 2024 in the headline and first three paragraphs)
©2024 Bloomberg L.P.
