Ringgit stable ahead of data-dependent rate decision amid US-China trade war

The currency will remain sensitive to the prospects of higher US interest rates, says analyst

By MARK RAO / Pic By MUHD AMIN NAHARUL

The local unit has been largely unperturbed by the US and China trade tariff rift, and stocks on Bursa Malaysia regained losses from Wednesday as fears of a trade war between China and the US abated.

Oanda Corp head of trading for Asia Pacific Stephen Innes said the US-China trade rhetoric shifting back towards reconciliation overnight is supportive of the local unit.

“The ringgit is far more insulated than the regional export powerhouse (China), although it will trade weaker with a US dollar bias, while likely to trade with a stronger local bias on an escalation in trade tensions,” he told The Malaysian Reserve (TMR).

The local note opened flat yesterday at RM3.8657 against the green-back compared to Wednesday’s close of RM3.8693. Over the past year, the ringgit has appreciated by 12.9% against the greenback.

Innes said the currency will remain sensitive to the prospects of higher US interest rates with the NFP data today set to give the foreign- exchange (forex) market some indication of where the US dollar-ringgit exchange is headed this year. “Two-way flow and position adjustments will hold the ringgit in a close range as the market veers towards today’s key US non-farm payroll,” Innes said.

“A return of the softer US dollar narrative and escalation of trade war could see the dollar-ringgit exchange trading at RM3.83, while topside feels very much contained around RM3.90 to RM3.93.”

Affin Hwang Investment Bank Bhd senior director and head of equity capital markets Arvin Chia said the ringgit is also coming off a low base as the worst-performing Asian currency from 2015 to 2017.

“The realisation of the under-valued position of the ringgit has lent the currency support against a backdrop of global trade uncertainties,” Chia told TMR.

“Secondly, the global sell-down in equity markets on Wednesday was not specific to Malaysia alone as most regional markets registered substantial losses as well.”

It remains unclear if the tensions between Beijing and Washington over tariffs are to remain a war of words or could escalate into a fullscale trade war, though markets are anticipating both countries to come to an acceptable resolution.

Chia said the impact of a trade war on the ringgit and currency markets as a whole is difficult to quantify as numerous factors have to be taken into account.

“On one hand, China’s tariff on soybean products could potentially increase demand for palm oil products, which will benefit commodity-linked currencies, including the ringgit,” he said.

“However, a trade war stands to cause a rift in the global supply chain, which is negative for export-oriented economies like Malaysia.”

A senior forex trader said currency markets are preoccupied with the direction of the US interest rates — namely if the data moves the US Federal Reserve to raise rates more than three times this year.

The forex markets are discounting news flows surrounding trade developments between the US and China, at least in the near term.

“The current climate in equity markets is one of the quick shifts between risk-off and risk-on approaches, thus driving the market to move from heavy buying to heavy selling overnight,” one source told TMR under the condition of anonymity.

“Currency markets, on the other hand, are evenly balanced between bull and bear factors at the moment, and the US dollar has been relatively static during this period.”

Domestically, local authorities are favouring a stronger ringgit ahead of the impending general election this year.

Calmer investors reversed some of the heavy selling seen across Asian equity markets yesterday with the benchmark FTSE Bursa Malaysia KLCI rising 20 points, or 1.1%, to 1,836 points after closing 34.84 points lower at 1,815.94 on Wednesday as China announced its tariff response on American products.