KUALA LUMPUR: The ringgit should start to strengthen against the US dollar from the second quarter (Q2) of next year onwards and settle at the 4.40 level in the fourth quarter (Q4) of 2023, as the greenback is expected to enter a period of cyclical decline, according to AmBank Research.
The research house said the local currency has seen its weakest valuation against the US dollar on March 31, 1998, at 4.88.
"Upside pressure on the currency remains which will be coming from both external headwinds and domestic noises. We expect the ringgit to weaken further in the first quarter of 2023 to 4.80 against the dollar," it said in a note today.
AmBank Research forecast the interest rate differential between Malaysia and the United States would narrow in the second half (H2) of 2023.
"With sharp slowdown or recession risk in the US, we are of the view of potential rate pullbacks by the Federal Reserve (Fed) in H2 2023.
"With an estimated reduction of 100 basis points (bps) in H2 2023, this would mean the interest rate differential would drop from a peak of 1.25-1.50 per cent to 0.25-0.50 per cent," it said.
Besides, it said, the domestic economy would be much more settled post-15th General Election.
"This would mean the positive impacts of the 12th Malaysia Plan, foreign direct investment, domestic direct investment, domestic activities, exports and better management of inflation and Budget 2023 should provide the necessary comfort for the economy to expand around 4.5 per cent in 2023," the research house said.
Recapping the ringgit's performance this year, AmBank Research said the Fed's aggressive rate hikes in 2022 with the aim to cool inflation led to a strong upwards bias on the ringgit.
The currency fell by 13.5 per cent as of Oct 25, 2022, despite Bank Negara Malaysia (BNM) raising its policy rates by a cumulative 75 bps to reach 2.50 per cent until October 2022.
"Expectations are for BNM to raise another 25 bps in November 2022 and another 25 bps in January 2023," it said, adding that this will bring the policy rate back to the pre-COVID-19 level of 3.00 per cent.
It said the ringgit has remained weak despite the efforts to stabilising the currency by utilising around US$9.5 billion of BNM's reserves.
The Gross Domestic Product (GDP) recorded a strong growth of 8.9 per cent year-on-year in Q2 2022, it noted, adding that third-quarter 2022 GDP is expected to perform better, projected to hover around nine per cent to 10 per cent with the support of strong exports and domestic activities.
However, AmBank Research said the GDP is projected to grow at a slower pace in Q4 2022 to about 5.0 per cent.
Despite a strong full-year GDP forecast of around 7.5 per cent to 8.0 per cent, it said the ringgit is poised to stay weak due to the "dollar play".
"External headwinds plus domestic noises remain major drawbacks to the ringgit. Also, the interest rate differentials remain wide, favouring the dollar. We project the ringgit in Q4 2022 would be at 4.70 againstthe dollar," it added.