US-China spat and rising interest rates among risks to ringgit

However, looking at the regional currencies, Malaysia is among the best performers


The ringgit faces greater headwinds as worries over the escalating US-China trade war, slower global economic growth, the hawkish tone of US financial regulators on interest-rate hikes and concerns over Malaysia’s fiscal deficit affect market sentiment negatively.

The local unit rose to a 32-month high of RM3.86 on March 28 this year. But this year alone, the currency had lost 0.43% of its value against the US dollar.

The first round of US-China tariffs came into force earlier this month. A hawkish US Federal Reserve (Fed) position with the world’s biggest economy posting strong growth and low unemployment is putting pressure on emerging-market (EM) currencies including the ringgit.

But the ringgit is not the worst performing currency in the region. The Philippine peso had dropped 7.15% this year against the dollar, the rupiah shed 7%, the Thai baht (2.44%) and the Singapore dollar (2.1%) during the period.

Looking at the regional currencies, Malaysia is among the best performers. FXTM global head of currency strategy and market research Jameel Ahmad said the ringgit’s decline is largely fuelled by global trade headwinds, instead of any loss of confidence or economic issues in Malaysia itself.

“It is difficult to deny that investor appetite towards riskier assets, such as EM currencies, remains at risk due to the unpredictable nature of the current market uncertainties,” he said.

Jameel said trade war tensions, and the potential for increased geo-political tensions following US President Donald Trump’s tweet directed at Iran, continue to weigh on investor sentiment.

“For as long as these uncertainties in the market remain, it is more likely than not that EM currencies will struggle to find buyers.”

In this scenario, he said the ringgit will likely face further selling pressure and a depreciation past the RM4.10 mark against the US dollar is a possibility.

Oanda Corp head of trading for Asia Pacific Stephen Innes said the local note could appreciate to RM3.90 on a de-escalation of a trade war and weaker US dollar direction.

“If we have a resolution (in the US-China trade war), then Asean currencies will strengthen and oil prices will move higher — this should see the US dollar-ringgit exchange trade below RM4.00,” he told The Malaysian Reserve (TMR).

He added that the US dollar is expected to weaken with the country’s mid-term elections looming, coupled with its growing budget deficit, helping the ringgit to trade on a more solid footing against the greenback.

“If the US dollar comes under political stress from the mid-term US elections and a huge budget deficit, then the US dollar-ringgit exchange could trade below RM3.90.”

Meanwhile, sluggish palm oil prices and oversupply concerns threatening to dampen the rally in crude oil prices could pose a threat to the commodity-linked currency.

Innes said global growth concerns and the slowdown in China’s economy is currently hurting commodity prices.

“While the People’s Bank of China US$74 billion (RM299.7 billion) liquidity injection in the Chinese economy temporarily helped sentiment, I think most investors are only viewing this as a band-aid as risks could be more deeply rooted in China than market prices,” he said.

However, Jameel said the ringgit has a low correlation to commodity prices when compared to other commodity-linked currencies such as the Canadian dollar.

But BMI Research country risk analyst Darren Day said the ringgit sell-off was due to the run-up to the 14th General Election, the Fed’s two rate hikes in March and June, and the ramp-up of US-China trade tensions.

He said the local unit is expected to remain on a broad weakening trend over the coming quarters due to the outlook of the construction sector and reviews of major projects.

“Firstly, a deteriorating investment outlook due to the postponement and likely cancellation of mega projects, as well as the ongoing review of foreign-funded investments.

“Secondly, a likely widening of the fiscal deficit due to the populist policies of the Pakatan Harapan-led government,” he told TMR.

Malaysia’s fiscal deficit was reported at RM11.2 billion or 3.3% of gross domestic product (GDP) in the first quarter of this year.

Finance Minister Lim Guan Eng announced in May that the country’s fiscal deficit is expected to total RM40.1 billion or 2.8% of GDP for 2018 which, if managed, would relieve some pressure on the ringgit.

BMI Research predicts the ringgit to end at RM4.20 against the green-back by the end of 2018, bringing the average value of the unit against the dollar to approximately RM4.00 this year.