Partial trade deal, Budget 2020 a boost to ringgit

The prospective deal will reportedly cover key areas that were targeted by tariffs

Graphic By TMR

THE ringgit is set to strengthen after the US and China moved closer to a potential trade deal, while continued signs of Malaysia’s domestic resilience and fiscal consolidation bode well for the local note.

Representatives from Washington and Beijing managed to broker an initial or “phase one” trade deal that could see a definitive agreement signed as early as next month.

The prospective deal will reportedly cover key areas that were targeted by tariffs such as agriculture, currency and intellectual property.

US President Donald Trump also agreed to suspend a trade tariff planned to be levied on billions of dollars worth of Chinese goods this month.

While final details remain elusive, the “phase one” trade deal represents the biggest step taken by both nations to end the 15-month long trade war that rattled financial markets and put major global trade flows at risk.

FXTM market analyst Han Tan said the US and China have taken a “massive step” and stave off the immediate threat of a near-term escalation in trade tensions.

“Risk assets are set to extend gains into the week ahead, with investors finding comfort knowing that at least the previously threatened tariff hike on Oct 15 will be delayed,” he said in a research note last week.

However, he noted that markets have experienced elevated levels of optimism over a US-China trade deal in the past only for it to all come crashing down.

“Until the deal is signed and there’s enough compliance and follow-through that appeases all stakeholders, investors can’t fully rule out the risk of another flare-up in the US-China trade tensions,” he said.

“Such a risk warrants an air of caution among investors, even as they let out a sigh of relief and welcome the prospects of a ‘very substantial phase one deal’.”

A limited trade deal or truce is expected to restore risk appetite and could see the ringgit making strides towards the 4.16 mark against the US dollar, Han said in a separate research note.

The Malaysian government tabled a slightly smaller budget for 2020 last Friday, despite external headwinds brought on by the protracted US-China trade war.

Putrajaya revised its fiscal deficit target higher from 3% to 3.2% of its GDP in 2020, but is still a decline from the 3.4% expected this year.

Han said Malaysia’s 2020 budget continued to underlie the resilience of the country’s domestic economy.

“Malaysia’s aim of keeping the fiscal consolidation agenda intact, while forecasting a slightly faster 4.8% GDP growth for next year, should bolster the narrative surrounding its economic resilience,” he said.

The ringgit closed at 4.1865 last Friday against the greenback.

Heading into the trade talks this month, markets are fearful that Washington’s decision to blacklist 28 Chinese firms would impact the negotiations.

But China’s top trade negotiator, VP Liu He, was reported as saying that Beijing was willing to reach an agreement with the US, at least on areas important to both nations, to prevent the trade war from escalating further.

This year has been a volatile year for the ringgit which rallied 1.7% against the US dollar to close at 4.0610 on March 21, before depreciating 3.3% to 4.1940 on May 29.

The local note then strengthened to 4.1085 on July 15 only to hit a year-high of 4.2203 against the dollar on Sept 3. A potential US-China trade deal could restore some much needed stability for the ringgit.