Further uncertainty seen for ringgit in 2020

The risks of heightened geopolitical tensions and further volatility in commodity prices still feature in ringgit’s 2020 outlook

by MARK RAO/ pic by BLOOMBERG

A WEAKER yuan will continue to pressure the ringgit in 2020, while prospects of the US-China trade deal being delayed will expose the local unit to further volatility.

The outlook for the ringgit against major currencies is challenged by mounting external uncertainties, with US President Donald Trump saying he “liked the idea” of waiting until after the 2020 US elections before concluding a trade deal with Beijing.

Markets are now zooming in on the Dec 15, 2019, date as Washington is slated to impose an additional 15% tariff on US$160 billion (RM668.8 billion) worth of imports from China.

FXTM market analyst Han Tan said the date is now acting as the next marker in this protracted saga amid US and China negotiators attempting to work out an initial “Phase 1” trade deal.

“Investors are still speculating if the trade accord can be sealed before Trump has to decide whether to push on with his tariff threat on a further US$160 billion worth of Chinese goods,” he told The Malaysian Reserve (TMR).

“Should the deadline pass without more tariffs imposed, that could help emerging-market (EM) currencies and other riskier assets claim more upside.

“This is as investors will be relieved from the fact that Trump is willing to prevent an escalation in US-China trade tensions to pave the way for a ‘Phase 1’ deal,” he said.

Inversely, the longer investors are made to wait for a conclusive outcome, the greater the risk that the optimism surrounding a limited trade deal could peter out and unwind the gains made by riskier assets, Han warned.

The rising uncertainty on US-China trade negotiations comes after Trump signed into law a bill backing Hong Kong protestors.

All the events position the ringgit to end weaker against the US dollar for the second consecutive year.

The Malaysian currency is currently down 1.1% against the greenback year-to-date and closed at 4.174 against the greenback yesterday.

Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said the US dollar-ringgit exchange is expected to remain weak at around the 4.20 mark in 2020 amid challenging global economic growth prospects and a weaker yuan.

“We believe the global economy will endure challenging prospects given the uncertainty brought on by the ongoing trade war,” he told TMR.

He said the declines in manufacturing activities indicate businesses are cautious in their outlook, which will impact capital expenditure and labour demand, while central banks adopt accommodative monetary stances by lowering interest rates.

“In that sense, safe-haven currencies such as the US dollar and yen will continue to be highly sought after. The yuan could also remain weak, suggesting other currencies would follow the same trajectory.”

Han said the yuan’s performance and the Chinese economy will feed into the ringgit’s performance due to the Malaysian currency’s positive correlation to China’s economic fortunes.

“Should Chinese policymakers be moved into injecting more stimulus to support the world’s second-largest economy, in the absence of a trade agreement with the US, (that) could help shore up China’s overall growth momentum and provide support for regional market sentiment.”

China is Malaysia’s largest trading partner, contributing 20.6% or RM129.19 billion to Malaysia’s total imports and 13.7% or RM99.81 billion to total exports over January to September this year.

The risks of heightened geopolitical tensions and further volatility in commodity prices still feature in the ringgit’s 2020 outlook, Han said.

He added that the potential downgrade by FTSE Russell of Malaysian government debt from its indices remains a lingering uncertainty.

In September this year, Malaysia was retained in the World Government Bond Index (WGBI), but FTSE Russell — the global index provider — kept Malaysia on its watchlist pending a review in March next year.

Malaysia, which has been included in the WGBI since 2004, was first placed on the fixed income watchlist back in April this year.

Bloomberg reported yesterday that the US and China are moving closer to agreeing to the amount of tariffs that would be rolled back in a “Phase 1” trade deal despite recent tensions over Hong Kong and Xinjiang.

This triggered a late recovery in the Malaysian stock exchange and the ringgit.