Ringgit buoyed by external trade and anticipation of Fed rate cut

The local note finished 0.9% stonger against the greenback last week, ending 2 straight months of losses

By MARK RAO / Pic By TMR File

THE ringgit has made significant strides against the US dollar as positive domestic data and prospects of an interest-rate cut by the US Federal Reserve (Fed) helped the currency break a two-month long losing streak.

Despite the holiday-thinned trading period, the local note finished last week 0.9% stronger against the greenback at RM4.15. This ended over two straight months of losses which saw the ringgit depreciating 3.2% against the dollar from March 21 to the end of May this year.

Malaysia’s latest trade and manufacturing data, coupled with the rising likelihood of the Fed slashing lending rates as early as July this year, if not sooner, buoyed the performance of the Malaysian currency that week.

SPI Asset Management managing partner Stephen Innes said the surprising trade data and markets anticipating a Fed rate cut countered the larger concern of deteriorating US-China relations.

“The ringgit has been supported this (last) week by the markets aggressively pricing in Fed rate cuts but Asian currencies, especially the ringgit with its strong trade ties to Mainland China, will still be the biggest casualty of US escalating trade tensions with China.

“With US President Donald Trump threatening to implement more tariffs, the US dollar-ringgit floor should remain in check despite an apparent dovish shift from the Fed,” he said in a research note last week.

Innes said a further escalation in the US-China trade front, namely Washington slapping tariffs on an additional US$300 billion (RM1.24 million) worth of Chinese goods, could send the ringgit above RM4.25 against the greenback due to its vulnerability to a weaker yuan complex.

Nevertheless, the ringgit found a much needed but only temporary relief last week after Malaysia’s trade expanded 2.6% year-on-year to RM159.55 billion in April this year.

In addition, the country’s Nikkei Manufacturing Purchasing Managers’ Index, despite slipping to 48.8, showed the pressure on growth has eased while local manufacturers were positive on future output volumes.

Meanwhile, St Louis Fed president and voting member on the Federal Open Market Committee James Bullard said monetary easing may need to be deployed soon amid trade war risks, slowing global growth and absence of inflationary pressure in the US.

Note that an aggressive Fed rate hike cycle in the past, which saw US interest rates raised four times last year, put the ringgit under heavy selling pressure as funds flocked to the US bond market for better yields.

A cut in the US lending rate from the current range between 2.25% and 2.5% would follow Bank Negara Malaysia’s own rate cut last month, reducing the gap between the two key interest rates and helping to contain further outflows for the ringgit.

Malaysia’s trade and manufacturing numbers last week further underscored the resilience of the country’s domestic economy which grew 4.5% as measured by GDP in the first quarter of 2019.

FXTM market analyst Han Tan said onshore factors are expected to take a backseat to external drivers, namely the heightened US-China trade conflict, with the resilience of the US dollar implying that the ringgit could breach the psychological RM4.20 level.

“The ringgit, however, is expected to continue relying on Malaysia’s resilient economic fundamentals to mitigate its performance, with policymakers having sufficient buffers to prudently manage the effects from external downside risks to the domestic economy,” he said in a research note.

Other downside risks facing the ringgit include the prospects of FTSE Russel dropping Malaysia from the World Government Bond Index and the recent inclusion of the currency in the US Treasury’s watchlist for suspected currency manipulation.

The latter, in the worst-case scenario, could see Washington imposing trade sanctions on Malaysia, although the development is far more likely to rattle trading sentiment in the short term.