US-China trade tensions hurting ringgit


The ringgit extended losses against the US dollar to close at a six-month low yesterday as external factors continue to negate the resilient performance of the Malaysian economy.

Since March 21 this year, the local note has been on a steady decline against the greenback, depreciating 3.1% to close at RM4.19 yesterday — the lowest since Nov 28, 2018.

The fall in the exchange rate reverses the 1.7% gains the local unit made from the start of the year to late-March, as funds flocked to safe havens over risk-based assets.

The risk aversion was triggered by the return of targeted US- and China-led tariffs, putting trade dependent countries such as Malaysia at risk of experiencing a slowdown in exports and economic growth.

Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said demand for safe haven currencies will be prevalent as continued uncertainty over US-China trade weigh on risk appetite.

“The trade conflict between the US and China is very fluid. Discussions were very constructive in February and March and, the next thing you know, China was slapped with higher import tariffs in May,” he told The Malaysian Reserve.

“The latest move by the US to blacklist Huawei Technologies Co Ltd indicates the prospects for an amicable solution between the two countries appears to be wishful thinking at this juncture.”

He said it remains to be seen if China will resort to non-tariff measures against the US to gain leverage, fuelling further risk-off sentiment with investors and driving demand for US dollar and other safe haven currencies.

Mohd Afzanizam’s year-end target for the ringgit against the US dollar is maintained at RM4.21.

Malaysia registered a resilient economic performance for the first quarter with GDP expanding 4.5% year-on-year despite external headwinds.

The number, however, was insufficient to bolster demand for the ringgit as the fraught US-China trade ties underlay the deteriorating external picture.

Deteriorating Iran-US political and economic ties, ongoing European Parliament elections and Brexit uncertainty are other risks dominating global headlines.

FXTM global head of currency strategy and market research Jameel Ahmad said political uncertainties in the UK and European Union (EU) are feeding US dollar demand.

“With the euro and the pound accounting for a large proportion of the US Dollar Index, the political risks that are weighing on the EU and the UK are translating into support across the Atlantic for the US dollar,” he wrote in a research note yesterday.

“As long as the US economy doesn’t show meaningful signs of a sharper economic slowdown and trade tension concerns continue to linger in the atmosphere, this should help support the resilient US dollar narrative,” he stated.

The ringgit’s weakness is not an isolated case with the Thai baht, Indonesian rupiah and Singaporean dollar down 4.1%, 2.8% and 1.9% respectively against the greenback since March 21.

As Malaysia retains a high percentage of foreign shareholding in its capital markets, the currency remains vulnerable to funds outflows.

Any monetary easing or plans to boost onshore market liquidity will thus do little to stem the decline of the ringgit.

Recent US-Sino trade tensions have also weighed on crude oil prices which typically bolster the ringgit during trying times.

Brent oil came off its year-high of US$74 per barrel in late-April to trade at US$70 per barrel at the time of writing on fears over demand falling on escalation of US-China trade tensions.