Stronger yuan rate calms currency war fears

This lends buying support for Malaysian equities as the move partially eases fears over the emergence of competitive devaluation


MALAYSIA’S stock market recovered from early panic selling as investor fears over a full-blown US-China trade war were eased on the stronger than expected yuan fix by the People’s Bank of China (PBoC).

The benchmark FTSE Bursa Malaysia KLCI (FBM KLCI) fell to as low as 1,588.98 early in the day, down 21.43 points, but made significant strides to end the day 1.38 points higher at 1,611.79 as investors bought stocks like Tenaga Nasional Bhd, Malaysia Airports Holdings Bhd, Hartalega Holdings Bhd and RHB Bank Bhd.

Market fears were calmed after the PBoC set the midpoint trading range for the Chinese yuan at 6.9683 per dollar — lower than Reuters’ estimate of 6.9736.

Inter-Pacific Securities Sdn Bhd head of research Pong Teng Siew said this lent buying support for Malaysian equities as the move partially eased fears over the emergence of a currency war or competitive devaluation.

“The factor driving the FBM KLCI recovery was easing concerns that the rift between the US and China will escalate into a full-blown trade war after China’s central bank set the yuan’s midpoint trading range stronger than expected,” he told The Malaysian Reserve.

“This took many by surprise, leading markets to believe any competitive currency devaluation undertaken by China will not be excessive.”

The Chinese yuan breached its key psychological level of seven against the US dollar on Monday — the first time since May 2008 — after US President Donald Trump announced 10% tariffs on an additional US$300 billion (RM1.26 trillion) worth of Chinese imports starting next month.

This fuelled speculation that China could engage in competitive currency devaluation, whereby the PBoC adjusts the yuan fix higher and higher to offset trade losses — similar to what it did back in 2015.

Prospects that the US-China trade rift could escalate into a currency war sent equity markets worldwide tumbling, with Wall Street bearing the brunt of the sell-off as investors fled for safety.

The Dow Jones Industrial Average closed 767.27 points lower at 25,717.74 on Monday, while the Nasdaq was down 278.03 points at 7,726.04.

Malaysia and Thailand were the only markets to end the day in the green yesterday among the Asean-5 economies, though other markets did recover from the day lows noted in early trading.

Moody’s Investors Service Inc sovereign risk group VP Martin Petch said the US Treasury labelling China a “currency manipulator” is an escalation of trade tensions between the two nations, and is expected to contribute to a hardening of positions.

It further increases the likelihood that US tariffs on Chinese products will rise beyond current levels, followed by retaliatory measures by China, he said.

“Unless negotiations between the US and China resume rapidly, this latest development is likely to create negative spillover effects in China, the US and globally, particularly in Asia,” he said in a statement yesterday.

“At this stage, we do not expect the US Treasury designation to have a material impact on China’s foreign-exchange policy. However, market expectations of potential further yuan devaluation may lead to devaluation in other currencies, particularly those with strong trading ties to China.”

Pong said Malaysian equities have had a volatile year thus far on extraneous factors like the US-China trade tensions and will continue to be influenced by external factors. “It has not helped that liquidity has been tight domestically, while corporate earnings continue to be lacklustre,” he said.

“Corporate earnings are a guide for valuation and will thus have a bigger influence over the long-term direction of the market.”

After hitting a year-high close of 1,730.68 on Feb 21 this year, the FBM KLCI plunged to as low as 1,598.32 on May 24. Year-to-date, the index is down 4.7%.

The ringgit lost further ground against the US dollar after trading as high as RM4.19 yesterday. The local note has a high beta to the Chinese yuan, bearing a 60% correlation to yuan weakness.

VM Markets Pte Ltd managing partner Stephen Innes said the Malaysian ringgit is holding up better than expected despite its historically tight correlation to the yuan.

“This is likely a direct result of the lack of a non-deliverable forward market which is benefitting the ringgit as it trades with less sensitivity, good and bad, to the yuan these days,” he said in a research note yesterday.

Given the likelihood of some US trade war reprisal, he expects US dollar-Asia and US dollar-ringgit to extend higher in the coming days.

“Lower oil prices make the ringgit that less attractive,” Innes added.