by MARK RAO/ pic by BLOOMBERG

THE ringgit could gain from returning risk appetite among investors following the constructive US-China trade talks.

Last Friday, the local note closed at 4.1865 against the US dollar as traders digest Malaysia’s Budget 2020 allocation that stresses on the need for continued fiscal consolidation.

AxiTrader Asia Pacific market strategist Stephen Innes said markets were likely starting to position for a backtrack from the “Phase One” US-China trade deal.

This scepticism, however, quickly evaporated when China’s Commerce Ministry said it wants to reach a phased agreement to end the protracted trade dispute and remove tariffs as soon as possible.

Innes said the movement of the Chinese yuan is the main risk bellwether for Asean currencies, and further progress on key trade issues between the world’s two largest economies is needed to set the stage for future gains.

“What may now be critical for the yuan and Asean currencies is the outcome of the more significant issues, specifically the December tariff detente, a rollback of some existing tariffs and the Trump administration removing the trade ban on Huawei Technologies Co Ltd,” he said in a research note last week.

Innes stated that Malaysia’s recent budget largely met market expectations despite the country’s fiscal deficit target of 3.2% of GDP for 2020 missing the medium-term fiscal consolidation path.

This takes little away from the government’s commitment to fiscal prudence, he said, adding that focus this week in the foreign-exchange market will shift to Malaysia’s September inflation reading as measured by the consumer price index.

The need to offset external headwinds, alongside other financial obligations, saw the country revising its fiscal deficit target higher from 3% to 3.2% of GDP in 2020 from 3.4% deficit expected this year.

AmBank Group said the positive sentiments from Budget 2020 partially supported the ringgit’s performance last week, while the gains noted by the equity benchmark FTSE Bursa Malaysia KLCI and net foreign inflow were supportive of the local currency.

“For the week ahead, we expect the ringgit to continue to take cues on global risk sentiments, with our support levels pegged at 4.1719 and 4.1659, while our resistance is pinned at 4.1964 and 4.2047 (against the dollar),” it said in its research report last week.

September inflation is forecast to range at 1.3% year-on-year (YoY) from 1.5% YoY in August, the bank noted.

AmBank is scaling back its expectations for a November rate cut by Bank Negara Malaysia (BNM) based on the details of Budget 2020.

“With a mildly expansionary budget, we feel BNM has some room to stay behind the curve,” it stated.

Markets were initially expecting BNM to lower the Overnight Policy Rate for the second time this year when its Monetary Policy Committee meets for the last time next month.

If the central bank opts to maintain the benchmark lending rate while the US Federal Reserve cuts rates again this year, it could position the ringgit for gains against the dollar as traders chase yield.

AmBank noted that China’s slowing economy, which grew at its slowest pace in three decades in the third quarter of 2019, poses headwinds for the ringgit.

The bank, however, maintained its year-end target for the local note at 4.19 against the US dollar.