KUALA LUMPUR (Jan 10): Ringgit drops for a third day, extending losses past the psychological 4.0 level, after the dollar climbed to a one-week high as Treasury yields jumped overnight.

* USD/MYR gains 0.1% to 4.0130

** Support 3.9388, 3.9300, 3.9038; resistance 4.0465, 4.0965, 4.1184

** BBDXY gained 0.2% Tuesday as 10-yr UST yield jumped 7bps to 2.55%

* Ringgit has limited room to extend a rally that was based on a weaker dollar, higher oil prices and an improving growth outlook, says Trinh Nguyen, a senior economist at Natixis SA in Hong Kong

** Any MYR gains will be limited to 3.9 by end-2018 as markets weigh implications of Fed balance sheet reduction and stronger U.S. growth

** Additionally, Malaysia’s upcoming general election “is far from a done deal” with ex-PM Mahathir leading the opposition, even if many believe PM Najib will probably emerge victorious

* Maybank sees further MYR strength being frontloaded in early 2018 as Malaysia heads towards a general election and BNM prepares to raise interest rates, analysts led by Saktiandi Supaat wrote in note Tuesday

** On Z-score basis, MYR’s REER is about 1.3 standard deviation below its 10-year mean and remains ‘relatively cheap’ among Asia
ex-Japan FX

* Bank of America Merrill Lynch favors ringgit vs dollar as MYR is still undervalued at 4.0 per USD because of Malaysia’s current-account surplus, strategist Rohit Garg wrote in note * Benchmark KLCI index may rise to 1,860 by end-2018 although markets will be concerned about valuations which are the highest in Southeast Asia: Nomura

** NOTE: KLCI -0.3% to 1,826.95 on Tuesday