By MARK RAO / Pic By BLOOMBERG
The ringgit came under pressure yesterday as fears of a slowing global economy and weak Chinese economic data forced investors to seek safer instruments.
China, Malaysia’s largest trading partner, posted an economic growth of 6.6% for 2018, the lowest pace in 28 years.
The local unit jumped to a five-month low against the US dollar at RM4.09 on Jan 11 this year, but retreated to RM4.13 yesterday for a 0.16% year-to date (YTD) decline.
The International Monetary Fund had also lowered growth targets for the global economy for 2019 and 2020 to 3.5% and 3.6% respectively.
FXTM research analyst Lukman Otunuga said renewed fears of a global economic slowdown is bad news for emerging-market (EM) currencies.
However, he said the ringgit’s downside may be cushioned by the greenback weakness and improving macroeconomic conditions domestically.
“A robust increase in domestic private consumption and exports remain critical factors for Malaysia to experience economic growth,” he told The Malaysian Reserve (TMR).
“If trade tensions ease and Malaysia’s central bank adopts a more hawkish approach, the ringgit has the potential to appreciate this year,” he said, adding that the US dollar volatility, ongoing US-China trade developments and commodity prices would influence ringgit’s direction.
The US Federal Reserve (Fed) is expected to take a break from raising interest rates this year, subsequently boosting EMs currencies. Interest rates have been used to boost currencies values.
“This scenario will be a welcomed development for EM currencies including the ringgit,” Otunuga said, adding that a weaker US dollar direction should limit capital outflows which is positive for the local unit.
Fitch Solutions Macro Research country risk analyst for Asia Darren Tay said a dovish Fed will likely support the ringgit as it will further skew real yield differentials in favour of the Malaysian currency.
However, he said the research firm does not expect the federal funds rate to maintain at current levels this year.
“We expect Malaysia’s economic growth differential against the US to widen in 2019 to 1.7 percentage points from an expected 1.4 percentage points in 2018 and, all else being equal, this would increase the fair value of the ringgit,” he told TMR.
He added that the research firm is holding a slightly bearish outlook for the ringgit in 2019 as it expects the currency to average at RM4.25 against the greenback this year.
Tay said there is a strong likelihood of a further slowdown in GDP growth for the world’s second-largest economy with a projected growth of 6.2% for 2019.
Otunuga said confidence over the health of China’s economy was dealt with a blow after the country’s 2018 GDP numbers.
“While it is too early to come to any meaningful conclusion over China experiencing a sharp economic slowdown, the growing fears over this becoming reality are likely to continue weighing heavily on EM currencies,” he said.
A slowdown in the Chinese economy in 2019, and a re-escalation in the US-China trade tensions are among the key downside risks facing the ringgit due to Malaysia’s trade exposure to both nations.