Oil, AI demand give ringgit room to rally, say strategists

Malaysia's currency may be set for a rebound, according to some financial strategists. The ringgit has seen a decline of 1.2% in September, trailing behind other Asian currencies. However, analysts are optimistic about potential gains as higher oil prices and the rise of artificial intelligence contribute to positive tailwinds for the currency.

MUFG Bank anticipates the ringgit to strengthen to 4.03 per dollar by the end of the year, while Sumitomo Mitsui Banking Corp sees it at 4.0. The Malaysian ringgit closed 0.3% higher at 4.0738 per dollar on Friday.

The country's energy exports could benefit from rising oil prices, while its growing role in the AI supply chain exposes it to growing demand for semiconductors. With political risk premiums easing following some state elections, strategists anticipate the ringgit to resume its upward trajectory. The country's overall fundamentals remain positive, driven by strong exports, including semiconductors, and favorable linkages to the Chinese yuan.

Malaysia has become one of the world's four largest net exporters of AI-related hardware, alongside South Korea, Taiwan, and Thailand.

Exports have surged more than 35% in each of the five months through August, with electronic products contributing significantly to this growth. The country's trade surplus in electronics helps offset the higher oil import bill. The ringgit's real effective exchange rate is currently about 2% below its 20-year average, according to data from the Bank for International Settlements.

Continued inflows into Malaysian government bonds may further support the currency. Investors are closely monitoring the S&P Malaysia manufacturing PMI print for September, which could provide further insights into economic expansion in the region. Despite the global energy situation, Malaysia may fare better than some other countries due to its status as a top exporter of liquefied natural gas.

The central bank's stance becoming slightly more hawkish further supports the case for the ringgit to outperform, with analysts recommending a long trade between the ringgit and the Thai baht.