Ringgit direction tied to trade news, Budget 2020

By MARK RAO / Graphic By ANIS SHAMSUL

THE ringgit will trade to the US-China trade-centric headlines as the economic giants hold high-level talks this month, while currency traders will keenly watch Malaysia’s Budget 2020 for economic stimulus measures.

The local unit made modest gains against the US dollar to close at 4.185 last Friday.

This was largely due to the weaker US dollar index which, after climbing to an over two year-high on Monday, fell 0.6% to 98.8 last Friday.

The weaker greenback follows the US’ non-manufacturing activity for September coming in at its weakest in three years and considerably below market expectations.

An uptick in US non-farm payrolls data could quickly reverse the greenback’s fortunes, but protracted US-China trade war conditions have increasingly and adversely impacted both nations’ respective economies.

This could see Washington and Beijing representatives be more willing to agree to concessions when they resume talks on Thursday this week ahead of impending trade tariffs.

FXTM market analyst Han Tan said the outcome from the US-China trade talks could well set the tone for investor risk appetite for the remainder of 2019.

“Headlines that show both sides drawing closer to a trade deal would encourage market sentiment and drive up risk assets in the near term,” he said in a research note last week.

Han said on the domestic front, investors will be on the lookout for any fiscal stimulus from Budget 2020 that could serve to offset external economic headwinds, while attention will be paid to the government’s projections for next year’s fiscal deficit.

“The ringgit may react positively to policies that can foster domestic demand, considering recent import data has shown on-year contractions for consumption and capital goods for three consecutive months through August,” he said.

For the week ahead, another bout of risk version could see the US dollar-ringgit exchange-rate test the 4.20 resistance level while more dollar moderation could send the currency pair towards the 4.16 support level, Han noted.

Budget 2020, which will be tabled in Parliament on Oct 11, is widely expected to be an expansionary budget to foster economic growth amid a slew of external risks threatening the domestic economy. This would be a welcome relief after the over RM1 trillion in national debts forced the administration onto an austerity path.

AxiTrader Asia Pacific market strategist Stephen Innes, said the federal government requires a combination of fiscal and monetary policy to ward off and protect against the carnage from the global trade war.

“I think the trade war is keeping CEOs on the sidelines (in terms of spending), however, and if they don’t start to spend or the government does not open up their purse strings, global growth concerns will still dominate,” he told The Malaysian Reserve (TMR).

He noted a weaker US economic direction is also a negative for the ringgit due to the impact on commodity demand.

“While the ringgit is more than a commodity currency, palm oil and oil play a big part. In addition, I think the market will not be happy with the shift from fiscal prudence.”

Oanda Corp senior market analyst for Asia Pacific Jeffrey Halley, noted Malaysia is not in a position to indulge in strong fiscal stimulus due to its current finances.

While fiscal expansion will be a welcome boost for Malaysian equities in the near term, he said there are concerns the amount of borrowing the federal government would need to undertake could push up borrowing costs.

“It is unlikely to benefit the ringgit as an increase in government debt to fund the expansion will cause international investors to fret over the government’s fiscal position,” he told TMR.

Malaysia’s strong balance of payments surplus should mitigate some of that effect he said.

Halley said the ringgit is expected to struggle to break past the 4.20 level against the US dollar while a trading range of 4.17 to 4.20 is likely for this week.