MYR: Trump Tariffs' Indirect Victim
The Ringgit ended 2024 strongly with some optimism due to US cuts, but it is looking increasingly unlikely that it will maintain its strength in 2025.
We expect USDMYR to trade significantly higher in 1H25, reaching 4.48–4.55 by March, with a key resistance at 4.50 that could break if the trade war escalates. Weak macro fundamentals and BNM’s limited intervention capacity may push the pair to 4.65–4.78 by June.
Our thesis is driven by three factors:
Widening Yield Spreads: Policy rate differentials have likely peaked, and hawkish US Treasury pricing will widen US-MY bond spreads, weakening the MYR.
Trump’s Tariffs: MYR’s strong correlation with CNH and CNY means it will react sharply to escalating tensions.
BNM’s Constraints: Despite large reserves, BNM’s illiquid gold holdings and net-short position leave FX reserves insufficient to fully cover Short-Term Debt, limiting intervention capacity.
Macro Data Point To a BNM Hold, But it’s Not Enough To Protect the MYR
Inflation data remains soft in Dec 24 as headline CPI comes out at 1.7% y/y, unexpectedly cooling from Nov 24’s 1.8%. Core data hit a 35-month low of 1.6% (Nov 24: 1.8%), falling to the pre-pandemic average of 1.8% for the first time since Mar 24.
This cooling is driven by weakening inflation in Recreation, Healthcare and Miscellaneous Goods and Services. Disinflation is worryingly concentrated in these small-weighted product segments.
The larger-weighted baskets all stagnated or even ticked up, a concerning trend especially since some inflationary government policies are imminent.
Food and Beverages rose to 2.7%, up from Nov 24’s 2.6%. This is its highest level since Oct 23 and has contributed 0.8% to the headline inflation figure.
Housing (3.2%; Nov 24: 3.2%) and Transportation (0.4%; Nov 24; 0.4%) stagnated as the interest-rate sensitive basket paused its recent disinflation trend. We see both baskets remaining in this range for now.
Despite this somewhat favourable inflation print, inflation is expected to rise in 2025 on Anwar’s administration policy moves.
Civil service wage hikes (15–42%) under the revised Public Service Remuneration System.
A minimum wage increase to MYR1,700 (from MYR1,500), fueling demand-pull inflation.
Sugar tax hike (MYR0.90/L from MYR0.40/L) starting Jan 2025.
Expanded Sales & Service Tax (SST) from May 2025, covering non-essential goods and B2B services.
Despite a positive Dec 24 inflation data, we expect inflation to continually rise in 2025 as the Anwar administration looks to expand its tax base and rationalize subsidies. Inflation will likely rise to the 2.3-2.4% range in 1H25, a range which may discourage the BNM from loosening monetary policy.
Malaysian GDP surprisingly dipped in 4Q24 advanced estimated (4.8%; 3Q24: 5.3%) as Mining (-1.4%; 3Q24: -3.9%) and Agriculture (-0.6%; 3Q24: 3.9%) shrunk while Manufacturing growth slowed to 4.3% (3Q24: 5.6%). The only bright spots were Construction (19.6%; 3Q24: 19.9%) and Services (5.3%; 3Q24: 5.2%) which grew across all sectors and led by retail and wholesale trade.
Weak headline figures in 4Q24 are not indicative of further slowing in 2025 as we see some tailwinds.
Expansionary fiscal policy – Government spending at ~20% of GDP will boost demand.
Wage-driven consumption – Civil servant and minimum wage hikes will support private consumption (61% of GDP).
Singapore-Johor Special Economic Zone (SJ-SEZ) - Boost investment into Malaysia as Singaporean-based economic activity rushes across the causeway to capitalize on lower land and labour cost.
Malaysia’s growth outlook for 2025 remains strong, driven by macro tailwinds. We expect GDP to reach 4.8%, a level that effectively rules out any pro-growth rate cuts by BNM
Despite significant appreciation in 2024 due to the August carry trade unwind, the MYR has steadily weakened. The market seems to see the USDMYR to be fairly priced at 4.40-4.50 range, needing significant external events to push it out of range in 4Q24. For instance, the 24 Jan 25 appreciation followed Trump’s statement that he would “rather not” impose tariffs on China, boosting investor interest in EM Asian assets. We note that the US-China Trade War will be highly relevant for the MYR outlook in 2025.
Despite recent stability, we note that the inability of the BNM to hike will be a major pain point for the MYR. Foreign holdings of Malaysian Government Bonds (MGB) have been inversely correlated with the UST-MGB 10y yield differential. Indicating pressure on MYR if differentials remain wide as foreign investors pull money out of Malaysian assets
Initially, it was hoped that the US rate cut cycle would spur a rotation into MGBs as yield differentials narrow or even reverse like in Sep 24. However, with US inflation remaining sticky, prospects of deep cuts have nearly vanished with markets pricing in only 2 cuts in 2025. Therefore, the UST-MGB 10y yield differential will not narrow any further in 1Q25. We see the pressure on UST yields to be mainly on the upside as Trump’s inflationary policies build the case for “higher-for-longer” rates.
Ultimately, the macro environment is unfriendly towards the MYR. From both the growth and inflation perspective, the BNM will likely keep rates unchanged for the rest of 2025.
Any narrowing of yield differentials will depend on the US. While 1 or 2 cuts are likely in 2025, in the near term, we see upward pressure on UST yields to spur further selling of MGBs by foreign investors.
Tariff Pressure and the MYR-CNY or CNH Correlation
The 1 Feb 25 deadline set by Trump showed a glimpse of what to expect from the markets regarding tariff threats in 2025.
The MYR and CNH maintain a strong correlation (~0.7), driven by Malaysia’s export reliance on Beijing. Despite some diversification, 12.8% of all exports still go to China, the 2nd largest export destination after Singapore. Kuala Lumpur’s supply chain is still highly linked to China as 24% of its value-added output ends in Chinese exports. These deep economic linkages mean that Trump’s tariffs need not directly target Malaysia for it to feel the impact on FX.
This correlation makes the MYR the ideal CNY or CNH proxy.
While both the MYR and CNH/CNY are not internationalized currencies, the MYR is given more flexibility. Unlike China, which manages the CNY around a Fixing Rate (±2%), Malaysia allows the MYR to float more freely, making it more volatile and reactive, particularly to tariff threats on China.
Trump’s Tariff threats are just beginning. Market sentiments will swing wildly on Trump’s rhetoric and the overarching theme is that Tariffs are back in fashion.
While it is still in its early days, we have 2 key observations that may guide expectations of Tariff implementations.
Hawkish rhetoric is reserved for economies that are more reliant on the US (Canada, Mexico and EU) rather than geopolitical rivals. However, actual follow-through is still concentrated on the US’s geopolitical rivals.
Trump is relying on uncertainty to push negotiations forward. Therefore, when Trump is threatening Tariffs on allies, expect eventual backtracking despite his rhetoric. Expect tariffs to follow through when he is threatening rivals.
For Malaysia, direct Tariffs are unlikely to be implemented or even threatened as they are insufficiently large enough while having a relatively good relationship with the US. This perspective means that the MYR may only be impacted by Trump’s Tariffs through hawkish rhetoric and actions against China.
In the coming months, we expect Trump to escalate the trade war with China, driving weakness in the MYR for 1H25. Tariffs on China are one of the few bipartisan agendas left in the US now. China will likely hold off on policy loosening until significant tariffs are implemented. If the PBOC loosens or the trade war intensifies, the MYR will suffer substantial weakness as a result.
BNM Is Unable To Intervene Significantly
In 2024, the BNM was active in the FX markets, working to smooth volatility. Their efforts, mainly focused on the forward market, provided some support for the MYR. However, this required capital commitment, leading to an inverse correlation between FX reserves and USDMYR.
Since then, the BNM has entered a strange circumstance. IIts net FX reserves (defined as FX reserves minus gold and net forward positions) have fallen below total short-term external debt. To be clear, this does not indicate that Malaysia is in a credit crisis or is in imminent danger of defaulting. However, it does suggest that strong interventions is less feasible.
BNM’s Forward Book shows net shorts of USD 29.3bn or 25% of Malaysia’s total foreign reserves. This position has been accumulating for years, especially since it has been the preferred tool of intervention by the BNM in 2024.
Continued defense through the forwards market is unlikely as BNM is exposed to significant risk with such a large USD short position. Since the MYR is not internationalized, BNM’s net short position is sufficient in tightening the market supply of MYR to support the currency. However, if sentiment turns bearish which ignites a sudden sell-off, the BNM might be forced to tap into its FX reserves to close its positions or risk large losses. In such an event, the MYR will weaken significantly more than the current macro fundamentals would suggest.
The BNM has successfully protected the MYR but its strategy has likely run its course. Aware of the significant net short position, the BNM may be less willing to intervene during short-term market volatility. Therefore, the US-China trade war’s spillover effects will significantly move the MYR weaker in the coming months.
Conclusion
Of course, this bearish MYR view has some risk to it.
With the SJ-SEZ in the works, they will likely enjoy an initial boost in investments as Singaporean businesses pivot. However, we maintain the view that such moves will be MYR positive in the short-run but investment flows will likely be insufficient to push the MYR stronger in 1H25. Legal, regulatory and economic standards have to be equalized across the causeway which will take some time and the full effects of the SJ-SEZ will only be felt in 2026 onwards.
Overall, Telok Ayer Macro expects the USDMYR to trade at the 4.48-4.55 range with some resistance at the 4.50 level. The resistance will likely be overcome by news of escalating tariff rhetoric which would depreciate the CNY or CNH that the MYR is so closely correlated to. By Jun 25, the USDMYR will likely depreciate to the 4.65-4.78 range.