Ringgit direction to hinge on key economic data

The protracted US-China trade war conditions could see a 2nd cut to BNM’s OPR

by MARK RAO/ pic by BLOOMBERG

THE ringgit is expected to trade range-bound as financial markets await the release of key economic numbers from Malaysia, the US and China that are due this week.

The deteriorating US-China trade ties and moderating global growth are prompting central banks across the globe to slash lending rates to manage their domestic economies.

New Zealand, India and Thailand’s central banks announced larger than expected interest-rate cuts last week, while the Reserve Bank of Australia kept rates at record lows.

Bank Negara Malaysia (BNM) lowered its Overnight Policy Rate (OPR) in May, but the protracted US-China trade war conditions could see a second cut to 2.75%, which will be the lowest level deployed by the central bank since March, 2011.

FXTM market analyst Han Tan said Malaysia’s July inflation and the second-quarter (2Q) GDP prints due this week are expected to feature in BNM’s policy outlook.

“With several regional central banks recently announcing larger than expected rate cuts, the easing bias among Asian policymakers has become more pronounced, in light of the deterio-rating global growth outlook,” he said in a research note last week.

He said US inflation, retail sales and industrial production data this week could shape US monetary policy as the greenback sways on shifting market expectations over the next rate cut by the US Federal Reserve (Fed).

“China’s July industrial production and retail sales announcements could also influence broader sentiment surrounding Asian assets, given the region’s overall reliance on China,” he said.

China’s Producer Price Index (PPI), one measure of corporate profitability among Chinese firms, noted a 0.3% contraction in July — higher than the 0.1% decline anticipated by analysts.

VM Markets Pte Ltd managing partner Stephen Innes said the softer China PPI will put pressure on margins, especially for Chinese steelmakers, which will have the knock-on effect of dragging down the cost curve.

“On the broader scale, weak demand will continue to negatively impact expectations on the production side, a critical narrative that continues to unfold on the global scene, which is lending support to the call for more dovish central responses,” he said in a research note.

While synchronised monetary easing from major central banks worldwide should contain any broad sell-off of ringgit or other risk-based assets, the protracted US-China trade war conditions are fuelling heightened risk aversion in global financial markets.

The US-China tensions will continue to be felt in the markets, whereby a more pronounced clash of wills between the two economic giants is likely to further dampen risk assets including Asian currencies, Han said.

“For the week ahead, the RM4.20 mark remains the psychologically important resistance level for the US dollar-ringgit exchange, while a break below RM4.168 could be met with stronger support at the currency pair’s 50-day moving average of RM4.148,” he added last week.

It was a week of sustained losses for the ringgit against the greenback as the re-escalation of US-China trade tensions and fears over a currency war erupting saw traders flocking to safety.

The ringgit depreciated 0.6% to end last week at RM4.184 against the dollar compared to RM4.158 the week prior.

Strong economic numbers this week will lend support to a robust domestic economy despite external headwinds, while potentially lowering the case of a second BNM rate cut this year.

Malaysia’s inflation as measured by the Consumer Price Index came in at a 1.5% year-on-year (YoY) growth in June, while the country’s GDP grew 4.5% YoY in 1Q19.

If BNM keeps rates steady at 3% and the Fed further eases monetary policy this year, it would lend support to risk appetite and potentially bolster the ringgit’s performance going forward.

In the meantime, the local note will be influenced by the direction of the yuan due to its correlation to the Chinese currency.

The People’s Bank of China set the midpoint reference for the yuan at 7.0211 per dollar yesterday, which is stronger than market expectations.

This will continue to assuage fears that China will engage in competitive currency devaluation to offset trade losses from the US.