Ringgit dragged by China growth concerns

A slowdown in the Chinese economy would thus hurt the Malaysian economy as well, positioning both the country’s respective currencies for weakness down the line

by MARK RAO/ pic by TMR

CHINA’S slowing economic growth capped the ringgit’s gains, while the stronger than expected preliminary US factory numbers lent support to a stronger greenback direction.

The Malaysian currency made modest gains against the US dollar over the past two weeks, despite the US and China entering a “phase one” trade deal and Malaysia’s Budget 2020 generally being well-received by the market.

The ringgit’s performance was the result of a “very minor risk wobble” due to recent Brexit developments and the US VP Mike Pence’s hawkish comments on China, AxiTrader Asia-Pacific market strategist Stephen Innes said.

“Last Friday, there was a general tendency for traders to de-risk and in Asia, there are still concerns about China’s economy which is expected to slow down for the rest of the year,” he told The Malaysian Reserve (TMR).

China’s economy as measured by GDP grew by 6% for the third quarter of this year, the slowest since 1992.

The world’s second-largest economy is also Malaysia’s largest trading partner after Singapore, contributing 13.6% or RM89.04 billion to Malaysia’s total RM653.46 billion worth of exports from January to August this year.

A slowdown in the Chinese economy would thus hurt the Malaysian economy as well, positioning both the country’s respective currencies for weakness down the line.

Meanwhile, European Union ambassadors are reportedly meeting to discuss how long of a delay to offer the UK from its initial Oct 31 Brexit deadline, keeping Brexit uncertainties alive at present.

But Washington and Beijing have made significant progress towards ending a 15-month trade war — which has seen billions of dollars worth of US and Chinese goods slapped with tariffs — after agreeing to a “phase one” trade deal.

A trade deal will prove a huge boon to regional and risk-based currencies such as the ringgit, which has long been a victim to the risk aversion brought on by the US-China trade tensions, but the shape of the Chinese economy is proving to be the bigger determinant at present.

“More troubling is the rise in China’s consumer price index (CPI) which reduces the scope for China’s central bank to ease — this is tempering risk sentiment. China and the yuan is very much influencing regional sentiment.”

He added that Malaysia’s own CPI for September, which rose 1.1% year-on-year and came in below expectations, indicated that demand weakness is starting to play a significant part in the economic slowdown.

This raises the odds of Bank Negara Malaysia cutting interest rates sooner rather than later, he said.

However, this isn’t necessarily bad news for the ringgit as it would stimulate the domestic economy, Innes added.

The ringgit’s performance against the dollar has remained within a tight range of RM4.18 to RM4.20 since late September, helping to facilitate economic activities, ForexTime market analyst Han Tan said.

“A much stronger currency may not be in Malaysia’s best interests given the current global economic climate,” Tan told TMR.

“Consider Thailand, where policymakers are actively trying to rein in the baht’s strength, which has been blamed for curtailing its economic growth.”

The Malaysian currency traded as low as RM4.1850 against the US dollar last Friday, only marginally stronger when compared to the local note’s closing of RM4.1865 on Oct 11 this year — when Malaysia’s 2020 budget was tabled and the “phase one” trade deal was announced.

The US’ preliminary manufacturing data for October also bolstered the greenback’s performance last Friday, thus slightly dragging the ringgit’s performance that week.