KUALA LUMPUR: The ringgit may weaken against the US dollar next year but could still outperform several major Asian currencies, according to HSBC.
The bank said resilient domestic fundamentals will help the ringgit cushion pressure from a stronger greenback and widening interest rate differentials.
HSBC expects the ringgit to trade between RM4.10 and RM4.20 against the US dollar in 2027, compared with its current range of RM4.05-RM4.10.
HSBC Asia FX Research head Joey Chew said the local currency will remain under pressure from sustained US dollar strength, interest rate differentials and potential political uncertainties.
Chew expects the ringgit to fare better than the Thai baht, Indonesian rupiah and Philippine peso, as those economies face greater exposure to higher oil import costs, relatively low interest rates and domestic political or policy uncertainties.
The ringgit may, however, underperform some North Asian currencies, particularly the yuan and South Korean won, which are benefiting from stronger semiconductor export revenues and efforts to promote greater international use of their currencies.
She said the ringgit had largely traded between RM4.05 and RM4.10 since the second quarter, after briefly strengthening beyond RM4 in the first quarter.
“After the midterms, there’s a bit of volatility in the dollar, but the US Fed is expected to hike in December, so we can get that little bit of dollar strength at the end of the year,” she said.
Speaking at HSBC’s foreign exchange investment outlook today, Chew said the ringgit’s trading range could shift higher next year as the US dollar maintained its strength.
“Into next year, our view for now is still that we have a bit of a range, but the range might shift a little bit higher,” she said.
“So instead of RM4.05 to RM4.10, we might go into a RM4.10 to RM4.20 range.”
She said Malaysia’s political calendar could also influence investor sentiment, as global investors might become more cautious towards markets facing potential political changes.
The US midterm elections could also affect the ringgit indirectly through their implications for global technology investments, particularly if investors reassessed the artificial intelligence (AI) investment outlook.
Chew said investor positioning remained heavily concentrated in US technology stocks, particularly AI-related companies, leaving markets vulnerable to a significant correction if confidence in the sector weakened.
The impact on Malaysia would depend on whether any correction remained confined to company valuations or spilled over into investment spending and regional supply chains.
“If it spills over into what exports in Asia, including Malaysia, are doing, because of what it means for AI capital expenditure, capital expansion, investments, all these data centre investments in Malaysia and the region,” she said.
“All these exports that Malaysian companies are doing for the data centres, if it affects that outlook, then actually ringgit will also be affected negatively next year,” she added.
Ringgit Caught Between Dollar, Yuan
Chew said the ringgit was being pulled in opposing directions by a strengthening US dollar and the persistent appreciation of the Chinese yuan.
The dollar’s rebound had prevented the ringgit from strengthening beyond RM4, while the yuan’s gains had limited further weakness in the local currency.
“The dollar-ringgit is sort of stuck between these two. On the one hand, it cannot drop below four.
“On the other hand, because of the dollar-Chinese yuan, because of renminbi strength, it also doesn’t have enough momentum to weaken much more than, say, four ten,” she said.
She said the relationship between the ringgit and yuan remained significant given Malaysia’s open economy and close economic exposure to both the US and China.
Rate Gap Clouds Bond Inflows
Interest rate differentials between Malaysia and the US are another source of pressure on the ringgit, particularly as markets anticipate further monetary tightening by the Federal Reserve (Fed).
Chew said HSBC expected the Fed to raise interest rates another one or two times, while markets were also anticipating an increase in Malaysia’s overnight policy rate (OPR), although the expected magnitude was considerably smaller.
A wider negative interest rate differential could encourage Malaysian residents to seek higher returns overseas, including through investments in higher-yielding bonds and other foreign assets.
Chew noted that resident investment outflows in Malaysia reached a record high in the second quarter.
Meanwhile, foreign bond inflows might not provide equivalent support for the ringgit, as some investors could hedge their currency exposure while capturing higher yields.
“On the foreigners’ side, there are some inflows. A lot of the bond inflows are positive. However, the interest rate differential makes it worthwhile for foreigners to buy Malaysian bonds on an FX hedge basis,” she said.
“They actually get the yield pickup when they buy MGS and FX hedge at the same time. So some of these bond inflows that we see may not necessarily help this currency because they might be FX hedged,” she added.
Separately, HSBC economists expect Bank Negara Malaysia to raise the OPR in the first quarter of 2027.
Chew said persistent inflationary pressures from elevated oil prices and the potential impact of El Nino on prices across Asia would leave central banks with limited room for monetary easing.
“As long as oil prices, as long as inflation, as long as this idea of this El Nino affecting inflation in Asia remains, I don’t think any central bank, including Malaysia, despite having such controlled inflation rates, is able to have this luxury of thinking about rate cuts,” she said.