Some analysts do not rule out a financial crisis if the US-China trade war continues

by MARK RAO/ pic by MUHD AMIN NAHARUL

THE ringgit made up ground against the US dollar after the US and China agreed to resume trade talks in October, giving a breather to the global market that is already battered by the prolonged trade war between the world’s two largest economies.

Malaysia’s resilient economy also helped bolster the local note after exports increased, while economic activities remained strong.

But the outcome of the meeting next month would dictate the ringgit’s movement as some analysts had not ruled out a financial crisis if the Washington-Beijing trade war continues.

After closing at a 22-month high of RM4.2203 on Tuesday last week, the ringgit appreciated approximately 1% against the dollar to end the week at RM4.1790.

Malaysia’s export numbers rebounded in July, and easing Chinese yuan weakness provided the legs for the local unit to rise against the greenback.

“(Malaysia’s) data has been resilient and, despite the constant reference to external factors which I’m equally as guilty of overusing, data does matter,” AxiTrader Asia-Pacific market strategist Stephen Innes told The Malaysian Reserve (TMR).

“But the problem is that now your uncertainty is the new normal and even surprising robust data gives way to an uncertain future.”

Nonetheless, he said, the counter- cyclical efforts carried out by China’s central bank have helped stabilise regional risk which, in turn, took pressure off the ringgit.

“Trade talks are going ahead, which will be a near-term positive, even if everyone has moderate expectations, but also a return to a state of post-Group of 20 trade war neutrality will be a comforting place for risk,” Innes said.

The ringgit’s performance is closely related to the Chinese yuan, largely due to Malaysia’s trade exposure to China.

A positive outcome from the upcoming US-China trade talks next month would be a huge boost, but previous talks between both countries had been futile.

Worries remain as the US Institute of Supply Management Manufacturing Purchasing Managers’ Index for August fell to its lowest level in over three years when it came in at 49.1%.

“In this light, the trade war is no longer working for US economic interests, suggesting it could be time for the administration to change tack as the disquieting thud of covert US dollar policy intervention sounds in the distance,” Innes said in a separate research note.

FXTM market analyst Han Tan said further material signs of a deescalation in US-China trade tensions are expected to spur Asian currencies onto more near-term gains.

“If the US Federal Reserve (Fed) were to pivot towards a more aggressive easing stance, that should allow the ringgit to claim more upside against the US dollar,” he told TMR.

He added that the ringgit was able to draw some measure of support from Malaysia’s economic fundamentals, allowing the currency to fare better than other Asian currencies such as the Korean won.

“Malaysia’s economic resilience may (also) allow Bank Negara Malaysia (BNM) to lower the benchmark interest rate by a lesser quantum compared to its regional peers,” he said.

“Still, the overall easing bias among central bankers around the world is clearly evident, given the macro headwinds to the global economy.”

Malaysia’s central bank opted to lower the Overnight Policy Rate (OPR) to 3% in May this year and is widely expected to lower the rate for at least a second time this year due to external headwinds.

BNM’s Monetary Policy Committee is scheduled to meet on Thursday this week where it will make a decision on the OPR.

The central bank holding rates steady or lowering rates by a lesser quantum or less aggressively than its peers this year will keep Malaysian assets attractive to investors, at least in terms of yield and within the regional markets.

Innes, however, said the US-China trade war is likely to extend past the US elections next year, making an even stronger case for a policy response due to the “no end in sight” narrative.

“Eventually, this trade war is going to hurt the domestic economy in a big way, so a teaspoon of the preventative measure this year may lessen the need for a considerable cut next year that could be very negative for the ringgit.

“A very dovish hold next week sets up for a policy cut later in the years, and a Fed rate cut will offer policy wiggle room,” he said.