Ringgit Weekly Outlook - 8 September 2023

Possible trend reversal as US disinflationary expectation could pare down USD overvaluation

The ringgit weakened to above the 4.67 level against the USD due to the depreciation of the yuan and the strengthening of the USD index (DXY). Despite a marginal improvement in China's exports in August, the yuan continued to weaken above the 7.30/USD threshold due to the weaker-than-expected Caixin services PMI reading and lack of major stimulus by the government to invigorate the economy. Meanwhile, the DXY soared close the 105.0 level due to rising inflation expectations amid a strong ISM services PMI reading (54.5; Jul: 52.7) and rising Brent crude oil price.

The direction of the local note will be primarily influenced by the upcoming US core inflation reading (Consensus: 0.2% MoM; Jul: 0.2% MoM) and a series of economic data releases from China next week. Any below consensus reading from the US inflation numbers may trigger a dovish repricing in Fed rate expectations (CME FedWatch Tool is currently pricing in a rate cut in May 2024), which would reduce the overvaluation of the USD and benefit the MYR. The ringgit may also closely track the yuan, as the market will likely monitor China's stimulus plan and its overall economic health.