The Malaysian central bank is expected to keep the overnight policy rate (OPR) on hold at 3.25% today in order to attain a balance between defending the Malaysian ringgit and strengthening economic growth. Meanwhile, the BNM is expected to lower the Statutory Reserve Requirement (SRR) ratio by 50bp again to warrant enough ringgit liquidity in the domestic banking system. The onshore Klibor curve fell after the central bank cut SRR ratio in January. But as Malaysia's CPI inflation is expected to resume a downtrend from March, the central bank has room for further monetary easing.

Meanwhile, on the currency front, the Malaysian ringgit has recovered from its earlier losses since January end on easing domestic political turmoil, rebounding fundamentals, recovering oil prices and a favorable market sentiment.

Since September, foreign investors have added to their local bond holdings and moved to net purchasing Malaysian equities in February. The MYR is likely to remain vulnerable to external shocks, such as crude oil prices, PBoC's plan on the yuan exchange rate and the US Fed's tightening.

The PBoC has repeated its statement that it will keep yuan stable against a basket of currencies and that there is no basis for continued depreciation of the yuan. In the meantime, oil prices bottomed out recently. Market projections of the US Fed's tightening pace in the coming months will majorly drive market expectations.  Currently, the market fears are reduced as the US Fed is largely expected to keep its policy rate unchanged next week.

Meanwhile, the MYR is expected to appreciate moderately in April on the prospect of capital repartition by the state-owned oil firm. Additionally, the MYR in the near future might be undermined by certain domestic factors.

"We think the MYR could depreciate versus the USD when approaching the Fed's June FOMC meeting and expect USD/MYR to reach 4.38 at the end of June 2016. In addition, as China's macro data for January-February due on 12 March could remain lackluster, the MYR is likely to decline modestly as well", says Scotiabank.