KUALA LUMPUR: The resurgence of the sentiment favouring "further and fewer" Fed Funds Rate (FFR) cuts may slow down the ringgit's recovery, but it won't completely derail it, says an analyst.
Hong Leong Investment Bank Bhd (HLIB) now expects the ringgit to remain weak in the near term before resuming its appreciation path in the second half of 2024 (2H24), with expectations to end the year at 4.45 US dollar-ringgit (average: 4.65).
HLIB expects US dollar strength to eventually subside, likely around mid-year when it becomes more apparent that a pivot is forthcoming, bearing in mind the presidential elections in Nov.
"This should augur well for ringgit given the 93 per cent correlation between the US dollar index (DXY) and US dollar-ringgit.
"From an interest rate differential standpoint, the peaking of the FFR-overnight policy rate (OPR) spread has historically been a decent gauge of ringgit's inflection.
"Since the ringgit's unpegging, we highlight that periods of peak spreads witnessed ringgit recovery," it said in a note.
HLIB added that taking this a step further, an eventual rate cut administered by the Fed would narrow the FFR-OPR spread and further aid in ringgit's reprieve.
Meanwhile, HLIB also stated that following the pedestrian gross domestic product (GDP) showing in 2023, which saw an increase of 3.7 per cent year-on-year (YoY), it projects this to normalise upwards to 4.8 per cent in 2024.
It said this is driven by a rebound in exports and continued growth in domestic expenditure.
Moreover, HLIB said there is an optimism on further recovery in tourism, supporting the labour market - the industry constitutes almost a quarter of employment.
"In addition, the continuous growth in employment and wages should bolster household spending while investment activity is expected to be underpinned by implementation of national masterplans and increased realisation of investments.
"While the growth outlook is promising, downside risks could stem from weaker-than-expected external demand and slower global monetary policy easing plans.
"We keep our 2024 consumer price index (CPI) forecast at +2.6 per cent YoY (which incorporates some petrol price subsidy adjustment in 4Q24) and maintain our view for OPR to stay pat at 3.00 per cent this year," it noted.
HLIB also reckoned that the FBM KLCI will likely take a breather in 2Q24 before resuming its uptrend in 2H24 on back of Fed's rate inflection, alongside favourable domestic conditions.
It maintained a KLCI target of 1,630 for the year.
HLIB also noted that Malaysia remains under-owned by foreigners, with their shareholding near record lows.
"We continue to favour themes on tourism recovery, energy transition and Johor's reinvigoration," it said.