According to Moody’s, continued escalation of trade tensions with the US could exert downward pressure on the yuan
By MARK RAO / Pic By TMR File
THE ringgit could breach the key RM4.20 mark against the US dollar despite China’s central bank continued efforts to abate fears of a potential currency war erupting.
Financial markets fear the People’s Bank of China (PBoC) could devalue its currency to offset trade losses and has sent the ringgit and other emerging market currencies lower, but Moody’s Analytics said the downside to the yuan could be constrained by fears of capital outflows.
Moody’s noted continued escalation of trade tensions with the US could exert downward pressure on the yuan, especially via expectations of increased monetary stimulus.
Beijing may also allow the depreciation to continue in support of its manufacturing and export sectors, the rating agency noted.
“This is less severe than deliberate devaluation, which is often touted as an option,” it said in a report yesterday.
“A devaluation beyond Chinese yuan — seven per US dollar is unlikely, as it could trigger capital outflows and broad instability in China. The pain from the 2015 devaluation is still front of mind,” Moody’s noted.
FXTM market analyst Han Tan said the ringgit, like most Asian currencies, is expected to remain under pressure from the risk-off signals emanating from the sudden deterioration in US-China trade ties.
“Unless the US and China can reach a meaningful breakthrough in the protracted conflict, the upside for Asian assets will be significantly limited,” he told The Malaysian Reserve.
He said the performance of the yuan will also have a large bearing on the performance of regional currencies as global investors are wary over the prospects of a currency war.
“Although the Chinese central bank has recently injected some measures of stability into the yuan’s performance, a weaker yuan should largely exert more downward pressure on currencies of trade-dependent economies across Asia.”
The ringgit is exposed in this scenario due to its high beta to the yuan, bearing an approximately 60% correlation to its weakness.
Set against such external headwinds, the US dollar-ringgit exchange could test the psychologically important RM4.20 resistance level over the near term, barring sustained dollar weakness or an evident thawing of the US-China tensions, Han said.
The PBoC’s recent actions have somewhat calmed fears of a currency war, whereby countries deliberately depreciate the value of their local currencies to stimulate their respective domestic economies.
China’s central bank set the yuan’s daily reference rate at 7.0039 per dollar yesterday.
While this was the first time since 2008 that the fix was weaker than seven, it reportedly tracked earlier moves in the spot rate and was stronger than the 7.0156 average estimates of 21 analysts and traders surveyed by Bloomberg.
The protracted trade risks may force the Federal Reserve (Fed) to lower rates again this year and would be negative for Malaysia due to the country’s trade exposures to both nations.
Note that the ringgit was a victim to aggressive US rate hikes in the past, depreciating 2.7% against the US dollar in 2018, at the same time the Fed raised lending rates four times that year.
Month-to-date, the Malaysian currency depreciated 1.4% against the US dollar to close at RM4.1855 yesterday, and analysts foresee further losses on prolonged US-China trade tensions.
The ringgit had a volatile year thus far, appreciating 1.7% from the start of the year to RM4.06 on March 21 before depreciating 3.2% to close at a year-high of RM4.19 against the dollar on Aug 6.
Year-to-date, the ringgit is 1.3% weaker against the greenback.