The local currency climb is a sudden reaction to news that US and China would phase in tariff rollbacks
by MARK RAO/ pic by BLOOMBERG
THE ringgit strengthened to a three-month high against the US dollar as investors pinned hopes of a resolution to the brewing trade war between the US and China.
Washington and Beijing had been at loggerheads for months, threatening to increase tariffs for goods produced by both nations. But both countries had agreed to remove trade tariffs in stages, a significant step towards brokering a trade deal.
The local unit rose to 4.124 yesterday, the strongest close since July 26, 2019, after Washington and Beijing agreed to a phased rollback on tariffs slapped on billions of dollars worth of goods.
AxiTrader Asia-Pacific market strategist Stephen Innes said the ringgit rise was a sudden reaction to news that the US and China would phase in tariff rollbacks.
He said the markets had overlooked the possibility of an agreement as they were more focused on the prospects of further delays for the two superpowers to agree on a “Phase 1” trade deal.
“I think this is a significant boost for ringgit’s sentiment as it sends the trade truce on a very positive direction and may lead to all the tariffs getting rolled back,” he told The Malaysian Reserve.
“Currency traders are buying Asia on carry and the hope is that these tariff rollbacks will improve growth differentials in favour of (regional) economies,” he said, adding that the next test level would be 4.1 and 6.95 for the US dollar-Chinese yuan pair.
The ringgit’s performance is closely linked to the yuan due to Malaysia’s trade exposure to China. China is Malaysia’s largest trading partner after Singapore, contributing 13.6% or RM89.04 billion to Malaysia’s total RM653.46 billion exports from January to August this year.
A spokesperson for China’s Ministry of Commerce was reported as saying yesterday that the US and China had agreed to rollback in phases on tariffs that was previously imposed on each nation’s goods.
Both countries were working towards a “Phase 1” trade deal — potentially the first step in ending the over 15-month trade war which had rocked global financial markets and dragged global trades.
News of the tariff rollbacks came after Reuters reported that a meeting between US President Donald Trump and Chinese President Xi Jinping to sign an interim trade deal could be delayed as discussions continue over the terms and venue.
Prospects of a trade war détente via tariff rollbacks assuaged fears that the delay could be masking underlying issues which are preventing both nations from reaching a trade deal.
Malaysia’s benchmark KLCI Index — the FTSE Bursa Malaysia KLCI — rose 6.08 points or 0.38% at 1,609.33 yesterday.
The ringgit also gained against the British pound and Singapore dollar.
Against the pound, the Malaysian currency traded as low as 5.3076 (0.5% stronger than the currency pair’s previous close) yesterday. The local note also appreciated by as much as 0.1% to trade as low as 3.0411 against the Singapore dollar.
Bank Negara Malaysia’s decision to maintain the Overnight Policy Rate at 3% on Tuesday had bolstered the ringgit’s performance, especially as it came shortly after the US Federal Reserve lowered its interest rates for the third time in 2019 recently.
The development would boost demand for Malaysian assets as traders are on the lookout for higher yielding assets.