by MARK RAO/ pic by TMR Graphic
The ringgit pared back gains against the dollar as expectations of a US interest rate cut and funds returning to domestic capital markets were negated by persisting trade war risks.
For the week, the local note traded marginally weaker against the greenback at RM4.16 – depreciating 0.2 % from last week – as prospects of a US-China trade deal being struck at the G20 summit appear uncertain.
Malaysia has high trade exposures to both countries and an escalation on the trade war front is bad news for the export-oriented economy, while the ringgit itself has a high beta to the Chinese Yuan.
Vanguard Markets Pte Ltd managing partner Stephen Innes said the ringgit is forecast to lose ground against the US dollar as traders increasingly price in the worst-case scenario from the G20 meeting due to convene at the end of the month.
“As expected, the ringgit remained hostage to stable Yuan sentiment ahead of G20,” Innes said in a research note today.
“But with the pre-G20 negotiating window all but shut, I think traders will get increasing fidgety and price in the worst-case scenarios as we near the summit, so we continue to favour a weaker ringgit in the run-up to G20.”
He said the ringgit could move closer to the RM4.25 mark against the dollar on a trade war escalation due to the currency’s approximately 60% correlation to Yuan weakness.
US President Donald Trump threatened to raise tariffs on Chinese goods for the second in two months if China President Xi Jinping fails to meet him in the upcoming G20 summit at Osaka, Japan. China, on their part, is keeping tight lipped on both a meeting and trade deal.
Inversely, deteriorating trade ties between the world’s two largest economies is positioning the US Federal Reserve (Fed) to lower its benchmark lending rate as early as July this year amid risks to global growth and absence of inflationary pressure in the US.
“Worsening trade tensions should lead to a Fed rate cut and, in turn, this will provide more policy wiggle room for central banks in Asian emerging markets to be more aggressive with their macro policy buffer,” Innes added.
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 returns.
A cut in the US lending rate from the current 2.25% to 2.5% will follow Bank Negara Malaysia’s own rate cut last month and help contain further outflows for the ringgit.
Malaysia’s equity market is also seeing more foreign funds return after months of dumping which, coupled with a resilient domestic economy, should provide support for the Malaysian currency.
Funds abroad bought RM350 million net of local equities for the week ended June 7 – seven times higher compared to the previous week – despite the holiday-thinned trading period, according to MIDF Amanah Investment Bank Bhd.