US dollar theme leaves little space for ringgit’s upside, say analysts

The weakness raises the question of whether EM central banks will intervene in the market to protect their respective currencies


The upside for the ringgit against the greenback remains limited due to weak sentiments in both domestic and external fronts, as well as the slide in China’s yuan, according to analysts.

Oanda Corp head of trading for Asia Pacific Stephen Innes said as the US and China vie for supremacy in the global economy, the trade friction between the superpowers is leading to collateral damage on emerging markets (EMs) and the ringgit.

“Uncertainty and confusion around the trade war are slow, but surely leading the markets down the road to financial horror.

The ringgit depreciated 0.4% to RM4.044 against the greenback yesterday

“The US dollar/CNH, or the US dollar versus the offshore traded yuan, breached fresh highs causing the US dollar/ringgit to trade higher in sympathy,” Innes said in his trading market note yesterday.

The Chinese yuan has fallen more than 3% against the dollar in the past two weeks as tensions between the world’s two biggest economies fail to ease worried investors and traders. Both sides have threatened waves of new tariffs on each other’s exports.

The ringgit depreciated 0.4% to RM4.044 against the greenback in yesterday’s trading — a six-month low for the currency — with technicals suggesting the path of least resistance appears higher with the next key focus on RM4.05, according to Innes.

“With the dollar reasserting itself as the unquestionable hedge against the escalating trade war, there’s no escaping the wrath of a stronger US dollar,” he added.

Meanwhile, AmResearch Sdn Bhd foresees the upside for the ringgit to be limited due to the weak macro and micro sentiments.

“Our support level holds at 4.0161 and 4.0240, and we anticipate the ringgit to test our resistance level of 4.0320 and 4.0464,” it said in a note yesterday.

ForexTime Ltd global head of currency strategy and market research Jameel Ahmad believes the Colombian peso and the ringgit are the only two EM currencies that have traded higher against the greenback year-to-date.

Jameel noted that the speed of selling of EM currencies has slowed down compared to the early part of the week as they continued to show weakness.

“The US dollar has made an attempt to rechallenge 2018 highs after speculation circulated on Wednesday that US President Donald Trump might be adopting a softer tone on China.

“This means that global stocks are likely to trade cautiously with a lack of risk appetite, encouraging the ongoing lack of buying momentum for EM currencies,” he said in a release yesterday.

The weakness raises the question of whether EM central banks will intervene in the market to protect their respective currencies.

“This could come in the form of direct intervention in the foreignexchange (forex) market or raising interest rates, in an effort to attract investors back into their respective market.

“It should not be understated that what we are seeing in the forex market is a very broad-based dollar rally,” he added.

Jameel propounded that for as long as buying the dollar continues to be the trend of the forex market, there is very little EMs can do to prevent weakness.

Any break in EM currency weakness ahead could also be temporary, he added.