by MARK RAO / pic by BLOOMBERG
THE breakdown in the US-China trade truce sent the ringgit tumbling against the US dollar as traders flocked to safety on prospects of increased trade tensions and tariffs in the market.
US President Donald Trump shocked global financial markets when he announced Washington’s decision to slap 10% tariffs on US$300 billion (RM1.25 trillion) worth of Chinese imports, only a month after the two nations agreed to a truce during the Group of 20 summit in Japan.
Beijing, quick to the cue, vowed to fight back.
The headline fuelled heightened risk aversion among currency traders who are fearful of the impact of what a full- blown US-China trade war would do to global growth.
This sent the ringgit depreciating 0.9% against the greenback to close at RM4.16 last week, compared to RM4.12 the week prior, while mixed signals from the US Federal Reserve (Fed) kept investors grabbing for safety.
FXTM market analyst Han Tan said Trump’s latest threat to impose further tariffs on Chinese goods will keep traders in risk-off mode at the start of the week.
“Signs of potential retaliatory measures out of China in the near term will hurt market sentiment further and dampen demand for risk assets, including the ringgit, amid heightened concerns over intensifying US-China tensions,” he said in a research note last Friday.
“The US dollar-to-ringgit exchange could test the RM4.17 resistance level, driven by dollar-positive or risk aversion triggers, while the RM4.13 mark may come into play if risk appetite enjoys a rebound in the week ahead.”
He added that the local note could react to US and China economic prints, including the US non-farm payrolls released last week and China’s manufacturing and external trade numbers due this week.
“Should global investors be fed with more signals that global growth is deteriorating further, that could spur more risk aversion,” he said.
On the domestic front, Malaysia’s June industrial production print is unlikely to have a major effect on the ringgit’s performance in the week ahead, as extraneous factors continue to hold sway over Asian currencies.
Malaysia’s Industrial Production Index for June is due to be announced sometime this month and the country is hopeful it can extend the robust numbers that the domestic economy has been churning out thus far.
The slew of external and headline risks in the market now will likely counter any upside recognised by the ringgit from domestic fundamentals.
Meanwhile, although the Fed delivered on expectations by lowering its key interest rate last week, its chair Jerome Powell said the decision is to “insure against downside risks” and is not a signal for further monetary easing.
There were also dissenting votes from two Federal Open Market Committee (FOMC) members, suggesting further rate cuts this year might be hard to come by.
The FOMC is scheduled to meet a further three times this year in September, October and December.
The ringgit was a slated beneficiary of Fed easing as investors venture out for higher-yielding assets, while providing Malaysia’s central bank ample monetary flexibility for rate cuts of its own.
VM Markets Pte Ltd managing partner Stephen Innes said markets are reeling after Trump announced further tariffs on Chinese imports.
“With the global markets on edge after Fed chair Powell’s communication failed so miserably, few traders have been willing to step in front of this steam roller,” he said in a research note last Friday.
He said the US administration believes it has the upper hand after its second-quarter economic results and with Trump polling well during the Democratic debates.
“It was only a matter of time before Trump acted on this week’s early warning trade shot that the markets took far too complacently,” he said.
“If there was any doubt that the US-China trade negotiations are drifting further apart, this latest trade escalation puts that debate to rest,” Innes stated.