Foreign funds tiptoe back as ringgit recovers

New Straits Times

7 hours ago

KUALA LUMPUR: The ringgit's recent rebound is drawing fresh attention from regional fund managers, with early signs of tactical inflows suggesting a modest return of confidence in Malaysian markets.
After touching its strongest level this year at 4.1930 on July 1, the ringgit has since eased 0.73 per cent. Still, it gained 0.52 per cent against the US dollar last week, pointing to a steadier footing.
Year-to-date, the local note has strengthened six per cent, ranking as the third-best performing Asean currency after the Singapore dollar and Brunei dollar.
The improving sentiment comes as investors begin to reassess Malaysia's position amid a softer US dollar and shifting global dynamics.
SPI Asset Management said, while the recent gains are encouraging, sustained interest will depend on broader economic and policy signals.
"The firmer currency is encouraging some foreign investors to rebalance toward Asia, buoyed by trade optimism and a softer US dollar," he told Business Times.
However, he cautioned that this should not yet be mistaken for deep, long-term investor conviction.
"Foreigners are dipping their toes, not diving in. Structural buy-in will require more than currency strength.
"It needs clarity on fiscal reforms, stronger foreign direct investment (FDI) pipelines and a tech export narrative that's competitive with peers like Vietnam and Indonesia," he added.
While the ringgit's rebound has sparked market attention, Innes also caution against reading it as a sign of renewed structural confidence in Malaysia's economy.
He explained that the current rally is largely fuelled by external factors, including improved trade sentiment, a steadier Chinese yuan and growing expectations of US rate cuts.
Innes added that structural confidence will only return when investors see a long-term economic narrative beyond commodities and consumption.
"That means the execution of meaningful reforms, improved governance signals and investment that boosts productivity. Until then, this is more of a relief rally than a true renaissance," he said.
STRONGER RINGGIT EASES POLICY, INFLATION
Innes said the firmer ringgit gives Bank Negara greater flexibility in its monetary policy approach, while also offering some relief on the inflation front, especially for urban consumers.
He said it reduces imported inflation pressures, which means the central bank can hold a steady, data-dependent line without hiking to defend the currency.
"That's useful at a time when the domestic economy is still healing and subsidy realignment is politically delicate.
"If the US Federal Reserve starts cutting rate by year-end—as many expect—Bank Negara could even ease modestly without undermining ringgit stability, especially if trade flows remain healthy," he added.
On the consumer side, Innes said the stronger ringgit may help cap inflation in discretionary categories such as electronics, fashion and luxury goods.
As Malaysia is a net exporter of food and energy, it is somewhat insulated from global commodity price swings, but exchange rate strength still matters in shaping everyday consumer prices and easing the overall cost burden on households.
"Urban households will feel that in lower pass-through costs, helping to cap core inflation in discretionary categories.
"It won't eliminate cost-push pressures tied to subsidy reform or wages, but it does offer a cushion and some breathing room for policymakers managing the transition," he said.
According to Department of Statistics Malaysia, the inflation rate rises at slower rate of 1.1 per cent in June, the lowest in four years since February 2021.
Despite recent gains, the ringgit remains vulnerable to several external risks that could reverse its momentum.
Innes said a resurgence in US inflation could force the Federal Reserve to delay or even reverse its expected rate cuts, triggering a renewed dollar rally and putting pressure on emerging market currencies like the ringgit.
He added that a slowdown in China or political friction around the South China Sea would also dent sentiment.