Ringgit to remain susceptible to volatility as new tariffs kick in

Malaysia’s August PMI and July external trade numbers will be viewed within the global context of the ongoing US-China trade conflict, says analyst

By MARK RAO / Graphic By TMR

THE ringgit is set for another volatile week after having weakened to a near two-year low as a fresh round of trade tariffs took effect over the weekend.

Malaysia’s local note depreciated to a 22-month low of RM4.217 against the US dollar last Thursday with the losses largely driven by the re-escalation of US-China trade tensions and the yuan weakness.

It closed at RM4.205 last week against the greenback, but trade risks remain intact as neither Washington nor Beijing are expected to back down in their tit-for-tat trade war.

FXTM market analyst Han Tan said the next key resistance level for the ringgit — having reached its weakest level against the dollar since 2017 — can be drawn at RM4.253 against the greenback, while the support line is seen at RM4.192.

“With US tariffs on Chinese goods set to be increased on Sept 1, further signs of deteriorating global economic conditions moving forward would curtail appetite for Asian assets,” he said in a research note last week.

He said China’s recent manufacturing data may affect sentiment surrounding Malaysian markets this week due to Malaysia’s exposure to China, as well as the Chinese yuan’s influence over the ringgit.

“The ringgit may also experience volatility against major currencies, with Brexit uncertainties plaguing the pound as the UK Parliament reconvenes, while (last) Friday’s US non-farm payrolls could significantly sway the US dollar.”

China’s manufacturing numbers showed an expansion last month, as measured by the Caixin/Markit factory Purchasing Managers’ Index (PMI), but still highlighted downward pressure in the long-term due to the mounting trade concerns with the US.

The Chinese yuan is already 4.46% weaker against the US dollar in 2019 as traders flock to safe haven assets such as gold, the US dollar and the Japanese yen amid the rising US-China tensions which are having a tangible impact on global economic growth.

Han noted that Malaysia’s August PMI and July external trade numbers will be viewed within the global context of the ongoing US-China trade conflict.

AxiTrader Asia Pasific market strategist Stephen Innes said the weaker yuan will continue to have a domino effect on Asean currencies.

“Once yuan weakness becomes more sensitive to slower growth in China, this is where the cascading force pulls down commodity currencies and the euro since it has high foreign-exchange beta to global growth,” he said in a research note yesterday.

On Sunday, Washington imposed 15% tariffs on over US$125 billion (RM526.25 billion) worth of Chinese goods, thus prompting Beijing to push ahead with increased duties of between 5% and 10% on major US imports such as soybeans and crude oil.

Both parties are scheduled for talks later this month, according to US President Donald Trump, while Beijing’s recent tariffs only account for one-third of the over 5,000 US goods to be slapped with tariffs later this year.

Thus, the door is still open for a trade deal between the world’s two largest economies which — much to the bane of global financial markets and trade-dependent nations — remains unlikely.

“The chance that Trump capitulates to any requests by China is slim to none,” Innes said.

“China, on the other hand, will continue to negotiate despite the new tariffs, but will also be unwilling to meet the US demands.”

The ringgit volatility is here to stay as the US-China trade war conditions become a long-term structural issue in the market.

In 2019, the local note appreciated 1.7% to close at RM4.06 against the dollar on March 21, largely driven by a dovish US Federal Reserve, but has since weakened 3.6% to close at RM4.20 last Friday.

On a year-to-date basis, the ringgit is 1.74% weaker against the US dollar.