Ringgit hits 3-month high on dovish Fed

The Fed cutting the key lending rate by 50bps will possibly open a path towards the RM4.09 support level

by MARK RAO / pic by BLOOMBERG

THE ringgit was Asia’s best-performing currency as markets priced in a rate cut by the US Federal Reserve (Fed) apart from the lack of noise from the US-China trade front.

The local note ended 0.5% stronger last week against the dollar at RM4.11 compared to RM4.13 the week prior, its lowest closing in three months.

Compared to its Asian peers, the Malaysian currency appreciated against the Singaporean dollar, Japanese yen, Korean won and Hong Kong dollar last week.

FXTM market analyst Han Tan said markets have been pricing in a US interest-rate cut in July following Fed chair Jerome Powell’s indication that the US central bank has room to ease policy.

“Powell’s dovish comments (last week) have allowed emerging-market (EM) currencies to take advantage of the weaker US dollar, with the ringgit wrapping up the week as Asia’s best performer,” he told The Malaysian Reserve (TMR).

“Should markets be buoyed by the prospects of more stimuli out of the US central bank, that could lift EM currencies higher.”

He said the Fed cutting the key lending rate by 50 basis points (bps) (as opposed to 25bps) will allow the ringgit more upside against the dollar and possibly open a path towards the RM4.09 support level.

An aggressive Fed rate-hike cycle in the past, which saw US lending rates raised four times last year, put the ringgit under heavy selling pressure as funds flocked to US bonds for better yields.

Monetary easing from the Fed could partially reverse the losses noted by the Malaysian currency this year due to heightened trade risks, reports that FTSE Russell could drop Malaysian bonds from its global index and Norway’s sovereign wealth fund’s possible exit from the country’s bond market.

However, Fitch Solutions Inc country risk analyst Darren Tay said the sharp appreciation noted by the local note between July 10 and July 11 on the Fed’s dovishness suggest that further gains are unlikely on the Fed front.

He added that Powell’s references to trade uncertainties are a recognition of the ongoing concern for the global economy and export-oriented countries like Malaysia.

“We at Fitch Solutions have held the view that US-China trade tensions will likely be a protracted issue and that both sides will likely remain locked in a cycle of de-escalation and re-escalation,” he told TMR.

“However, its impact on risk appetite is likely to be episodic, rather than constant, such that investors are always risk-off because of the uncertainties stemming from the dispute.”

He said the resumption of trade talks between Washington and Beijing earlier this month, as well as the dovish shift from major central banks, could see an increase in risk appetite as investors search for yield.

Volatility has been a constant theme for the ringgit this year — having traded as low as RM4.06 and as high as RM4.19 against the dollar — and the recent US-China trade truce is far from the definitive agreement markets were hoping for.

Han said recent history suggests that a trade truce between the world’s largest economies have limited shelf life, and there remains a lingering risk that US President Donald Trump could follow through with his threat to impose additional tariffs on China.

“Such persistent uncertainties prevent risk sentiment from surging higher, while creating a supportive environment for safe haven assets such as gold, the Japanese yen and US treasuries.”

He added that markets are mindful of the potential signalling from a deeper than expected cut to US interest rates, indicating that the US economy is on shaky ground and in need of more accommodative policies.

“Such signals could spark risk aversion and dampen appetite for EM assets.”

At the same time, Han said Malaysia’s central bank has ample policy buffers to mitigate external downside risks to ensure the Malaysian economy remains on sound footing.

“Malaysia’s economic fundamentals remain resilient in the face of external headwinds, as evidenced by the continued growth in industrial production and external trade.”

Tay noted that Malaysia’s exports make up approximately 75% of the country’s annual GDP, putting the country at risk from rising global trade protectionism.

“That said, private consumption will remain a key growth driver, especially since the government is paying out RM37 billion in tax refunds this year, which would help boost disposable incomes,” he added.