Ringgit’s outlook: Sunny with some clouds

IF there is anything clouding the ringgit’s outlook or that of any currency, it is the lack of forward guidance from the US Federal Reserve (Fed) under newly appointed chairman Kevin Maxwell Warsh, who presided over his first Federal Open Market Committee (FOMC) meeting over June 17 to June 18.

There is acknowledgement to the commitment to its dual mandate of price stability and ensuring maximum employment.

Both are key issues as inflationary pressure remains unrelenting while underlying employment data show a stagnant job market, with hiring activity cooling in what analysts like to describe as “low hire, low fire”.

According to reports, this is the first time in 26 years that no forward-looking statement has been provided with clearer guidance as to monetary policy, although Warsh did sound hawkish.

He did imply a rate hike this year, and as soon as the September FOMC meeting.

Markets expect Warsh to sound dovish and signal rate cuts ahead.

This lack of a forward-looking statement has led to currency traders using the Fed’s staff economic forecast, which projects a 25-basis point hike in the federal funds rate, as a reference point.

Bank Muamalat Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid believes these traders have overshot in making bullish bets on the US dollar.

The current target range for the federal funds rate is 3.5% to 3.75% while Malaysia’s overnight policy rate (OPR) stood at 2.75% after a 25-basis point cut last July.

The market expects the OPR to remain unchanged this year.

“The markets have overly emphasised this factor while in actual fact, the new Fed chairman is merely looking for novel ways to address inflation.

“In some sense, it may not result in monetary tightening,” he says. “The ringgit’s performance will reflect the economic fundamentals.”

Year-to-June 24, the US dollar has strengthened about 2.2% against the ringgit, which is a reversal from the ringgit’s strength against the greenback that started in the fourth quarter of financial year 2025 (4Q25).

The ringgit was at its strongest in late February at RM3.8895, just before the Middle East conflict and a combination of risk-off trades and portfolio flows have weighed on its performance.

The ringgit closed at 4.1377 on June 24 against the US dollar.

“We’re still maintaining our year-end target of between RM3.95 to RM4,” Afzanizam says.

“This is premised on Malaysia’s resilient economy and sustainable balance of payment (BoP) as well as pragmatic approach on fiscal management.”

Additionally, exports of information and communication technology services have contributed to the surplus balance of the BoP’s services account for three quarters in a row.

This, in turn, has improved the surplus balance of the current account (CA), of which the services account is a part of.

The CA surplus balance stood at RM15.2bil as of 1Q26 or 3% of gross domestic product (GDP), up 0.5% from 4Q25.

The country’s electrical and electronics (E&E) exports have also witnessed a surge in demand, jumping 70.5% this May compared to the same month a year ago.

Afzanizam is confident that the ringgit’s performance will mirror the strong exports outlook in the second half of the year based on the World Semiconductor Trade Statistics.

In its Global Semiconductor Sales (GSS) projection published on June 2, the World Semiconductor Trade Statistics significantly revised global sales growth for 2026 to 89.9% compared to the Dec 2, 2025, projection of 26.3% growth.

The GSS is a leading indicator for the country’s E&E exports for the next five to six months, implying exports growth.

“Malaysia is also a leading beneficiary of the artificial intelligence (AI)-related investments, being among the top 10 last year,” he says.

United Overseas Bank (M) Bhd senior economist Julia Goh projects the ringgit to strengthen to RM4 by end-3Q26 and to end the year at RM3.98.

She says the bank’s stance on the ringgit was taken before the anticipated weakness due to uncertainties over the US rate outlook.

However, she does not expect the US dollar to strengthen to such levels.

But she notes that the ringgit has held up better than most regional peers through the Middle East conflict and has stayed below RM4 throughout.

“This suggests confidence in Malaysia’s underlying fundamentals,” she says.

“The CA remains in surplus, capital inflows into the bond market has picked up and the AI and data centre drivers are helping to lift exports and CA performance.”

Goh does not expect a sharp deterioration in the fiscal outlook.

“Perhaps a slight widening of the fiscal deficit depending on where the subsidy bill and GDP levels land but nothing that looks too worrisome.”

Malaysia is widely expected to miss the fiscal deficit target of 3.5% of GDP this year due to heavier spending on fuel subsidies after narrowing the deficit to 3.7% in 2025 and from 4.1% in 2024.

With state elections coming up over the next few months in Peninsular Malaysia, the obvious question is whether this will have an impact on the ringgit, to which Goh says that while domestic politics is on the radar, it will unlikely be a major market-moving factor.

“Malaysia has a decent track record of macro stability through election cycles,” she says.

“That said, the path is not linear,” she points out.

“Putting geopolitical risk premia aside, the key swing factor now is dealing with the spillovers into inflation, Fed rate path and interest differentials.

“A credible reopening (of the Strait of Hormuz) accelerates ringgit recovery.”