KUALA LUMPUR: The ringgit will likely strengthen to 4.35 against the US dollar by the end of 2023, according to UOB economists Julia Goh and Loke Siew Ting.
Goh and Loke said the current market expectations for the US Federal Reserve (Fed) ending its interest rate hike cycle by the first quarter (Q1) 2023 augured well for emerging market currencies including the ringgit.
This was also further supported by the continuation of China's economic stimulus and consensus of the still positive growth outlook for most Asian countries versus a projected mild recession in major advanced economies.
"At the time of writing (Jan 10), the ringgit traded at a stronger level of 4.3740 against the US dollar, as compared to 4.4045 at end-December 2022.
"In addition to external factors, expectations of political and policy stability in the local front will also help to provide a fillip to the ringgit outlook in the near term," they said.
Meanwhile, UOB said the cumulative gains in Bank Negara Malaysia's foreign reserves over the past two months were insufficient to fully offset the losses for the entire year with foreign reserves remaining lower by US$2.3 billion for the whole year of 2022.
Bank Negara's foreign reserves posted the largest monthly gain in 16 months by US$4.9 billion month-on-month (MoM) in December to end 2022 at US$114.6 billion.
"The latest reserves level has taken into account the quarterly foreign exchange revaluation changes.
"It is sufficient to finance 5.2 months of imports of goods and services (versus the generally-accepted 'rule of thumb' adequacy threshold of three months) and is 1.0 time of the total short-term external debt," it said.
While Bank Negara had yet to publish its December 2022 foreign exchange (FX) swaps data, UOB said the central bank's net short position in FX swaps had increased for the 12th consecutive month by US$1.6 billion MoM to another record high of US$26 billion as at end-November.
"It continues to mark the longest streak of increases for net short position since data began in April 2000, due to the combined impacts of US Fed's rate hike cycle and China's deteriorating growth outlook on ringgit during the year.
"The fresh record of US$26 billion net short position in FX swaps was equivalent to 23.7 per cent of total foreign reserves," it added.