Ringgit continues downtrend, centred on US-China trade woes

The ringgit recognised the bulk of its losses from March 21, depreciating 3.2% against the US dollar as traders flee for safety

By MARK RAO / Pic By TMR File

The ringgit failed to rise from its twomonth decline against the greenback due to deteriorating US-China ties and US recession fears are keeping traders averse to the currency and other risk-based assets.

Trading at a six-month low, the ringgit recognised the bulk of its losses from March 21, depreciating 3.2% against the US dollar over that period, as traders fled for safety amid mounting global risks.

Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said the prevalence of risk aversion is fuelled by a “wobbly” external sector centred on the US-China trade front, as well as continued Brexit uncertainty.

He said this is resulting in strong demand for US bonds while the inversion of the US Treasury yield curve, at minus seven basis points between 10-year and three-month securities, is portentous of a US economic recession.

“Typically, yield curve inversion indicates a possible recession in the horizon. This points to higher demand for safe-haven currencies and, therefore, the ringgit could remain weak in the immediate term,” he told The Malaysian Reserve (TMR).

In this scenario, the ringgit is expected to trade around the RM4.18 to RM4.20 level against the US dollar in the near term, he said. Further downside could be due for the ringgit after the US Treasury included Malaysia in its watchlist for suspected currency manipulation.

This is based on the country’s US$27 billion (RM113 billion) in bilateral trade surplus with the US and current account surplus of 2.1% of GDP, the Treasury said.

Bank Negara Malaysia (BNM) was quick to respond, stating that Malaysia adopts a floating exchange rate regime and the central bank intervention is used in both directions of the foreign-exchange (forex) market.

Mohd Afzanizam said Malaysia’s inclusion in the monitoring list for currency manipulation is not immediately concerning as the report indicates the ringgit has legs to strengthen.

“The (US) report suggested the Malaysian government should spend on high quality and transparent investment and social spending that will reduce precautionary savings,” he said.

“This is somewhat a vote of confidence for the ringgit as the narratives in the report were very mild compared to other countries.”

Fitch Solutions country risk analyst Darren Tay said the inclusion poses a threat to the ringgit if it leads to US sanctions on Malaysia, but this remains unlikely due to trade disputes elsewhere.

“While being labelled a currency manipulator by the US could be the prelude to the imposition of trade sanctions, which would be negative for the ringgit, the likelihood of that happening remains low,” he told TMR.

“This is especially as the US is still embroiled in trade disputes with China, the European Union and India.”

He said the key factors contributing to the ringgit’s decline are the re-escalation of US-China trade tensions and prospects of the FTSE Russell dropping Malaysia from the World Government Bond Index (WGBI).

“We believe that relief in the short term can come from Malaysia addressing FTSE Russell’s concerns around the country’s market accessibility, which would help assuage investor concerns about exclusion from the WGBI,” Tay said.

“The other way, which is mostly out of Malaysia’s control, is for the US and China to de-escalate trade tensions and return to a more benign state in their economic relationship.”

BNM announced new initiatives to improve the accessibility and liquidity of Malaysian financial markets — namely the forex and derivative and repurchase agreement markets — earlier this month.

This comes after the central bank carried out engagements with market participants to identify what is needed for a conducive and vibrant trade environment.

If successful, the initiatives could remove a key risk facing Malaysia’s capital markets and provide much needed relief for the recently battered ringgit which remains supported by a moderating, but resilient domestic economy.