Ringgit set for gains after US-China trade truce

Expectations of the Fed’s interest-rate cut and the US-China trade de-escalation provides much needed relief for the ringgit

by MARK RAO/ pic by MUHD AMIN NAHARUL

THE ringgit is expected to make gains against the US dollar on positive sentiment from recent US-China trade talks and bolstered by dovish tones from the US Federal Reserve (Fed), but weak global economic growth prospects remain a fundamental concern.

The local note closed at RM4.13 against the greenback last week, a fresh two-month high.

Expectations of the Fed moving to cut its key interest rate as early as this month and the rhetoric on the US-China trade front shifting from escalation to reconciliation provides much needed relief for the ringgit and other emerging-market (EM) currencies, and feed into risk-based appetite among investors.

At the Group of 20 Summit in Japan last week, US President Donald Trump said Washington will not impose additional tariffs on US$300 billion (RM1.23 trillion) worth of Chinese goods, while Beijing will buy “tremendous” amounts of US food and agricultural products.

US firms will be allowed to continue to sell to Chinese tech giant Huawei Technologies Co Ltd, lifting a previous ban imposed by the US.

The trade truce reached between the world’s largest economies is, however, not a definitive agreement, and risks to trade and global growth remain.

Vanguard Markets Pte Ltd managing partner Stephen Innes said the outlook for global growth remain bearish.

“My base case scenario (for US-China trade) is no escalation immediately, but I think a handshake will be viewed neutral at the open,” he told The Malaysian Reserve (TMR).

“(This is before) the market pivot realises underlying sentiment remains quite bearish in terms of the medium-term outlook for a US-China trade deal, as well as the global growth outlook.”

A deterioration on the trade front would put Malaysia at risk due to its high trade exposures to both countries, not to mention the ringgit which has a high beta (correlation) to the Chinese yuan. Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said the Fed’s decision on the interest rate remains the key factor for a weaker greenback and, by extension, a stronger ringgit.

Economic uncertainties fuelled by the US-China trade ties have dampened risk sentiment and increase the appeal of safe haven assets at the expense of higher-risk EM assets and currencies in the past year.

“Already we have seen 10-year US Treasury yields below the 2% level and gold prices surpassing the US$1,400 per ounce level,” Mohd Afzanizam told TMR.

“In that sense, investors are wary of global prospects and, therefore, shift- ing to risk-free assets would be the best way to navigate during such turbulent times.”

In this scenario, he said the ringgit is forecast to weaken and trade at about RM4.21 to the US dollar by end-2019.