Time to spend in the UK as ringgit rises against the pound

by MARK RAO/ pic by BLOOMBERG

THE ringgit is expected to strengthen against the British pound as the October deadline looms closer for the UK to work the final divorce agreement with the European Union (EU).

The local unit which had been impacted by the escalating US-China trade war, has found solace as the prolonged sterling weakness saw the ringgit rising 4.1% against the British pound this year alone.

Ringgit’s stronger performance provides a boost for locals to source products from the UK besides Malaysians who are visiting or studying in the world’s fifth-largest economy.

The UK is one of the favourite destinations for Malaysians to travel besides the thousands of locals who are studying in the country.

The British pound tumbled on the prospects that UK’s new Prime Minister (PM) Boris Johnson will force the country’s exit from the EU by Oct 31 this year with or without an agreement.

A no-deal Brexit could see the pound reach parity with the US dollar, warned former head of the UK civil service Lord Kerslake in a Business Insider article.

Oanda Corp senior market analyst for Asia Pacific Jeffrey Halley said a no-deal Brexit is an increasingly likely scenario at this point, but such outlook has not been met by the same negativity witnessed previously.

“It is certainly a knee-jerk possibility (the sterling reaching parity with the US dollar) if we have an acrimonious hard Brexit but like all knee-jerks, it often doesn’t last long,” he told The Malaysian Reserve (TMR).

“Britain will recover and so would the sterling although it may settle into a 1.1/1.2 range (against the US dollar),” he said.

He added that the European markets are in a sea of negative interest rates and slowing growth and the UK is expected to be in a better position to recover at a faster pace due to the flexibility of its economy.

Nonetheless, the British pound will continue to trade heavily against the ringgit on Brexit factors, Halley said.

“A sudden spike down versus the US dollar on a hard Brexit will see a spike down in the pound-to-ringgit exchange as well. This, though, could be seen as bargain levels in the longer term,” Halley said.

The British pound traded approximately 20% higher at 1.20 per US dollar yesterday, while the ringgit closed at RM5.05 against the pound. The ringgit was trading at RM6.69 against the pound on Oct 2, 2015.

VM Markets Pte Ltd managing partner Stephen Innes said the pound is currently in a holding pattern as there is a strong move to stop the UK PM from proroguing Parliament to force a no-deal Brexit through.

“I suspect there will be some form of deals negotiated after the political grandstanding runs its course, although I suspect my view is in the minority at this time,” he told TMR.

“My view was for the pound to price in a no-deal Brexit and, in my view, 1.15 to 1.20 (against the US dollar) appears to be in target,” Innes said UK’s strong domestic economy does, however, lower the chance of the country deploying monetary easing which, in turn, will provide buying support for the British pound, he said.

Halley said wage growth in the UK grew at its fastest pace in 11 years, while inflation data will show the country’s inflation at a respectable and manageable 2%.

However, he said the resilient UK economy will not stem the decline of the British pound, but noted that a weaker sterling is better for the country as it makes its exports competitive even amid trade barriers in Europe.

“Brexit is the overriding story and the British pound will be buffeted by its nuances,” he said.

He added that the sterling is running its own race for now irrespective of the ongoing US-China trade dispute.

Innes, meanwhile, said the trade war front is challenging as it raises significant new difficulties in managing bilateral trade negotiations between the UK and US post-Brexit.

Washington announced that tariffs on select Chinese imports will be delayed until Dec 15 this year, while other pro- ducts will be exempted altogether, citing health and security reasons.

This relates to the planned 10% tariff on an additional US$300 billion (RM1.26 trillion) worth of Chinese goods starting next month.

The headline sent markets across the globe higher yesterday, while the ringgit closed 0.2% stronger overnight against the US dollar at 4.1890.