Gloom prospects for the ringgit on trade, yuan and Fed risks

Ringgit is expected to trade with a weakening bias over the coming months if external headwinds remain evident


RINGGIT could trade at RM4.25 against the US dollar this year as markets seek to defend themselves against the fallout from the US-China war and look for safer asset classes.

The falling yuan also contributed to ringgit’s weakness, but would make Malaysia’s export cheaper — giving the country the advantage — as higher tariffs are slapped on products from China.

It has been a volatile 2019 for the ringgit which appreciated 1.7% to close at 4.0610 against the US dollar on March 21, supported by a dovish US Federal Reserve (Fed).

Sentiments however, turned negative at it has weakened 3.3% for a year-high of 4.1960 on Aug 13.

Protracted Washington and Beijing- led trade tensions, which are threatening to derail the US and Chinese economies, have created the volatility.

US President Donald Trump’s recent comment that “the longer the trade war goes on, the weaker China gets and the stronger we (the US) get” have all but confirmed that trade war conditions are here to stay.

VM Markets Pte Ltd managing partner Stephen Innes said markets will need to defend against a trade war extending through 2019 and past the US elections.

“If Trump wins, it will embolden his tough line trade talk mantra. We need to play Asia currency markets from a strong US dollar perspective as long as that possibility exists,” he told The Malaysian Reserve (TMR).

“Without a trade war detente or some semblance of trade war neutrality, I expect the ringgit to weaken to RM4.25 (against the US dollar) this year.”

FXTM market analyst Han Tan said the ringgit is expected to trade with a weakening bias over the coming months if external headwinds remain evident, though Malaysia’s economic resilience should mitigate the losses.

“Another major bout of risk aversion, perhaps driven by a further escalation in the US-China trade tensions or a rapid deterioration in global economic conditions, could send the US dollar-to-ringgit exchange above the psychologically-important RM4.20 mark,” he told TMR.

This is despite the resistance level having held firm so far this year, he added.

“The ringgit would need several tailwinds to crystallise, such as the Fed making a bigger pivot towards a more dovish stance or substantive signs that the US and China can end their trade impasse, before the Malaysian currency can open a path back towards RM4.10 against the greenback.”

Last Friday, the ringgit went from 4.1877 to 4.1920 against the US dollar in a matter of minutes in early-morning trade. It eventually settled higher at 4.1923, but 0.3% weaker for the week.

This came shortly after China’s central bank set the yuan’s midpoint rate at 7.0572 per US dollar — the weakest in 11 years since March 2008.

Innes said Asian foreign-exchange markets are taking note of the weaker yuan which depreciated nearly 0.7% in the past five trading sessions, while the ringgit depreciated only 0.3% over that same period.

The correlation between both currencies is expected at a minimum 0.5% to 0.6%, he said.

A weaker yuan will exert downward pressure on currencies for economies dependent on China for trade, including the ringgit due to its high beta to the Chinese currency.

Oanda Corp senior market analyst for Asia Pacific Jeffrey Halley said the yuan fix had an overflow effect into the region, while US treasury yields rose marginally the day before to support the greenback.

In the scenario that the Fed fails to deliver on interest-rate cut expectations this year, he said both the yuan and ringgit will trade on US-China trade war developments in the near-term.

Fed chair Jerome Powell’s key address during Jackson Hole Symposium last Friday, which hosted many of banking’s elite, will be closely scrutinised for clues to the direction of future US rate cuts in 2019.

“If Powell doesn’t come to the dovish party, the correction in markets will likely be quite violent,” Halley told TMR.

“That could flow through into aggressive selling of emerging and developing markets in the short-term.”

He said the US dollar is expected to remain strong for the remainder of the year on the country’s interest-rate carry and economic performance alone.

“That being the case, I continue to look for a gentle depreciation of the ringgit against the US dollar in the fourth quarter of 2019.”