BNM’s plans to boost onshore market liquidity and accessibility is expected to mitigate a key risk facing the ringgit, says analyst

by MARK RAO / pic by MUHD AMIN NAHARUL

THE ringgit dropped last Friday after a temporary respite a day earlier from the better than expected first-quarter (1Q) economic figures and higher crude oil prices which halted the currency’s seven-day slide.

The local unit shed 0.24% last Friday to close at RM4.174 against the greenback after a strong comeback last Thursday when the central bank announced a resilient GDP number.

Opening at RM4.17 against the US dollar last Thursday, the local unit strengthened towards the RM4.15 mark shortly after Bank Negara Malaysia (BNM) announced a 4.5% GDP growth for the first three months of 2019.

The print was largely within or above most research houses’ expectations, and traders were positive on the numbers which indicated a resilient domestic economy despite mounting external risks.

Oanda Corp senior market analyst for Asia Pacific Jeffrey Halley said traders were possibly expecting a weaker GDP print, thus fuelling initial buying demand for the Malaysian currency.

“The rally in the ringgit looks very much like a knee-jerk reaction into a thin liquidity market. Government finances will remain potentially pressured going forward as they have not replaced the projected income from the abortive Goods and Services Tax,” he told The Malaysian Reserve.

Consequently, Malaysia’s domestic economy may not be as resilient as the headline number suggests, he said.

FXTM market analyst Han Tan was more positive on the numbers, writing that Malaysia’s better than expected 1Q19 GDP underscores the resilience of its economic fundamentals.

The resilience is justifiable on the background of broader emerging markets contending with external downside risks which include cooling global growth and tepid economic data from key economies such as the US and China, he said.

Han said BNM’s plans to boost onshore market liquidity and accessibility is expected to mitigate a key risk facing the ringgit, namely the FTSE Russell dropping Malaysian bonds from its global benchmark index, which has weighed on the currency’s performance over the past month.

“Moving forward, as BNM’s initiatives take hold, I expect the ringgit to remain supported by Malaysia’s economic fundamentals, buffered by an accommodative monetary policy stance.

“(This is) even as Malaysia, along with other Asian economies, contends with moderating global growth trajectory, heightened uncertainties over the US-China trade ties and the resilient US dollar,” he wrote in a research note yesterday.

Malaysia’s economy as measured by GDP came in at 4.5% in 1Q19, bolstered by domestic demand (predominantly from private consumption) and the recovery in agro-based production, but offset by weaker investment activities.

The US-China trade war hit new highs after Washington announced plans to blacklist China’s technology giant Huawei Technologies Co Ltd from selling its products in the US. The move came after the US slapped a 25% tariff on products worth US$200 billion (RM836 billion) from China.

Beijing had warned that it would take the “necessary measures” to protect the interests of its companies.

US President Donald Trump’s decision to sign an executive order putting the country’s telecommunication sector under “national emergency” means all transactions will require the approval from Washington.

Trump’s action, believed to be targeting Huawei and other China’s tech firms which make and sell cheaper systems, sent equity markets around the world tumbling last Thursday and Friday. China was among the worst hit by the measure.

Halley said the failure of the US-China trade talks to reach a resolution would result in a steeper slowdown in the world economy.

“A slowdown in China would be harmful to the ringgit and other regional currencies dependent on China for their primary and intermediate exports,” he said.

Consequently, the direction of the ringgit will largely be influenced by how Malaysia responds to and manages a breakdown in global trade.