It seems like Anwar and Bank Negara Malaysia are speed running to transition Malaysia into a high income country.

On Friday (20 Sept), the ringgit jumped to RM4.1850 against the US dollar, a 31-month high, before retracing slightly to RM4.20.

The upward movement has been nothing short of impressive. The ringgit has came a long way in the past 3 months, which in July, was valued at RM4.7146.

Ringgit’s uptick comes as the Federal Reserve delivers a large rate cut.

On Wednesday, the Federal Reserve slashed interest rates by 50 bps (0.50%), the first rate cut since the pandemic in March 2020.

The committee chose to lower rates on the back of softening inflation, as it is moving sustainably towards the Fed’s target goal of 2%.

The 50-bps cut was in line with market expectations.

How will this impact Malaysians?

Rate cuts reduce the borrowing costs for consumers, most notably mortgages and new car loans.

It will also lower the returns for fixed income investments (ie. fixed deposits), which will prompt investors to seek higher yields elsewhere, possibly driving markets higher.

Since the US is the world’s largest economy and has the biggest stock market, a rally in US stocks will spillover to Malaysia, lifting local stocks as well.

Global markets closed higher after the Fed meeting.

The S&P gained 1.22% since Wednesday, reaching an all-time high of 5,715 points, led by major stocks Google ($164.27, +3.15%) and Meta ($562.10, +5.80%).

Over in Malaysia, the FBMKLCI closed at 1,670 points, which is 0.78% higher before the Fed meeting, driven by Public Bank (RM4.73, +0.83%) and RHB Bank (RM6.24, +1.11%).

Even as the Fed has begun to reduce interest rates, markets may not move up in a straight line. ⚠️

Stocks are likely to move cautiously in the weeks ahead, as the Fed has expressed concerns on the labor market and said that another large 50 bps cut was “not something we’re thinking about right now.”

What does a stronger ringgit mean for you?

i) Travelling and overseas education become cheaper.

The ringgit has not only strengthened against the dollar, but all major currencies in general.

• EURMYR: RM4.6935 (19-month high)

• SGDMYR: RM3.2583 (20-month high)

• GBPMYR: RM5.5981 (16-month high)

ii) Foreign goods become cheaper.

Last year, the iPhone 15 Pro Max launched at RM6,499 for 256 GB.

This year, the iPhone 16 Pro Max is retailing at RM5,999, which is RM500 (or 8%) cheaper than the older model.

iii) Foreign investments become cheaper.

Gold continues to surge and has reached a new all-time high of $2,622/ounce.

It is up 26.21% since January.

With the ringgit valued at RM4.20 against the dollar, one gram of gold is RM388, but Malaysian spot gold prices are actually lower, at RM354.52.

If the ringgit were still at the RM4.70 territory, gold would be RM435/g right now.

iv) Confidence in the ringgit (and Malaysia) will increase.

Though it is not an accurate reflection of Malaysia’s current economy, the ringgit’s long-term trend indicates investor confidence.

With proper policy reforms (diesel subsidy removal, wage hikes), we may just see the ringgit heading to RM3.80 in the coming years.

But why is the cost of living still so high? I don’t see grocery bills getting any cheaper.

According to RinggitPlus founder Hann Liew, this depends on the type of goods and whether it is influenced by the weakening dollar:

i) Locally produced goods that do not have a foreign supply chain (ie. rice, fish, and eggs) will not be impacted. Therefore, the weakening dollar has no effect on the prices of these goods.

ii) Locally produced goods that have some foreign supply chain (ie. soybeans, corn, feed for chickens and other meats) will be impacted by the weakening dollar, but this takes some time—roughly 6 to 8 weeks—to take effect.

iii) Foreign made goods or imported items will see price changes quite rapidly. The prime example is the listing price iPhone 16 Pro Max, which is RM500 cheaper compared to the older model.

That said, companies tend to readjust prices monthly or quarterly, so we may see price reductions for other imported items in the coming months.

iv) Price stickiness.

Price stickiness refers to the tendency of prices to remain constant or to adjust slowly despite changes in the cost of producing and selling the goods or services.

Very often, this happens in just one direction, where prices will rise much faster than they will fall.

Some firms will try to keep prices constant as a business strategy.

Take restaurants as an example. These businesses are unlikely to lower prices because they would have to go through the trouble of updating their entire menu.

Analysts year-end target was RM4.20, but the ringgit has already blown past it.

In my recent discussion with economist Sani Hamid, the projection for the ringgit was RM4.20 by year-end.

Mr. Sani said that this trajectory is unlikely to be a straight line, but the ringgit has defied all odds and continued to pump.

Moving forward, it’s best to be cautiously optimistic, as there may be retracements for the local note, considering such as aggressive upward movement.

Should inflation in the US get sticky or even increase, the Federal Reserve may slow down or even pause rate cuts, which will drive demand back to the dollar.

That’s all for this week’s newsletter!

Disclaimer: The information contained in this newsletter is for informational and educational purposes only. Nothing herein shall be construed to be financial, legal, or tax advice.

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