Protracted trade tensions have kept the local currency’s trajectory susceptible to trade-based headlines

By MARK RAO / Pic By BLOOMBERG

IT HAS been a volatile 2019 for the ringgit as prospects of the US Federal Reserve (Fed) turning dovish at the start of the year quickly gave way to a slew of external risks.

In the last month alone, the local unit traded in a 550-point range, hitting a high of 4.12 against the greenback on Nov 8, and then depreciated to a low of 4.185 on Nov 26, before closing at 4.1335 last Friday on news of a trade deal between China and the US.

For the week ahead, a sustained risk-on mode in the markets could see the ringgit-dollar exchange rate testing the 4.12 support level, followed by stronger support at the 4.10 mark, FXTM noted last Friday.

While monetary easing by the Fed this year boosted the appeal of risk-based assets as US Treasury yields trended lower, protracted trade tensions between Washington and Beijing kept the Malaysian currency’s trajectory susceptible to trade-based headlines.

Malaysia, as an export-oriented economy, was among the losers in this scenario, while a lack of domestic catalysts and prevailing political uncertainties kept it susceptible to foreign outflows.

The ringgit’s performance in 2019 is a reflection of the volatility in the marketplace this year, with the local note appreciating to a high of 4.0610 against the US dollar before declining to a low of 4.2203 year to date.

While Washington and Beijing had brokered a “Phase 1” trade deal, US President Donald Trump also hinted a final deal could only be forth- coming after the 2020 US elections.

Moderating global growth will likely keep the ringgit trading with a negative bias in 2020.

Here, The Malaysian Reserve looks back at the key events that shaped the ringgit’s trajectory in 2019:

January-March 21: Ringgit hit year-high of 4.0610 against the greenback.

After an aggressive rate hike cycle in 2018, the Fed took a breather in January. In its first meeting for the year, the Federal Open Market Committee stated it would be “patient” in determining the direction of future interest rates.

The Fed also raised lending rates four times in 2018 — a key driver behind the ringgit’s weakness as it declined by 2.7% that year.

As the US central bank turned dovish in the first quarter, the ringgit, which was perceived as sub-stantially oversold at the time, appreciated by 1.7% from the start of the year to close at its strongest level against the greenback at 4.0610 on March 21.

March 21-May 29: Ringgit declined 3.3% in just over two months.

Malaysia’s inclusion on FTSE Russell’s fixed income watchlist in April for a possible exclusion from the World Government Bond Index helped trigger an outflow of funds.

This, coupled with the prospects of Norway’s sovereign wealth fund exiting the Malaysian bond market, sent the ringgit plunging against the dollar — declining 3.3% from March 21 to close at 4.1940 on May 29.

Bank Negara Malaysia (BNM) then opted to lower its Overnight Policy Rate (OPR) to 3% in May — the first cut since July 2016 — as the central bank sought to take pre-emptive measures to manage the health of the domestic economy and offset external risks.

May 29-July 15: Prospects of Fed rate cut and US-China trade truce.

The ringgit strengthened to close at 4.1085 against the dollar on growing expectations that the Fed would deliver its first rate cut since the 2007-2008 financial crisis — potentially opening the door for further cuts in 2019.

Malaysia’s trade numbers and the gradual return of foreign money to Malaysian securities proved a resilient backdrop against the anticipated dovish Fed direction.

The biggest boost for the ringgit came in the form of the US-China trade truce reached in June during the Group of 20 Summit in Japan.

Washington agreed to hold back on additional tariffs on Chinese goods, while Beijing offered to buy sub- stantial amounts of US food and agricultural products.

US firms were told they could continue selling to Chinese tech giant, Huawei Technologies Co Ltd, lifting a previous ban imposed by the US.

July 15-Sept 3: Divisive Fed and currency war fears.

The positivity surrounding the ringgit was short-lived as the Fed lowered its key lending rate in July, but stressed the cut was to insure against downside risks and not a signal for further monetary easing.

The fact that the Fed’s decision was not unanimous had raised doubts over future rate cuts in 2019.

Trump’s threat of further tariffs on China sparked fears of a currency war erupting as China’s cen- tral bank devalued the yuan to off-set the higher American tariffs.

A weaker yuan sent the ringgit lower against the greenback due to the positive correlation with the yuan as a result of Malaysia’s sub- stantial trade and investment exposure to China.

Consequently, the ringgit closed at its weakest level against the US dollar for the year at 4.2203 on Sept 3.

Sept 3-Nov 7: Partial Phase 1 trade deal.

Washington and Beijing took a major step to do a trade agreement by announcing plans of a partial and “Phase 1” deal, which would cover key areas that were targeted by tariffs and useda as leverage during the escalating tensions.

The Fed also lowered its lending rates further — two times, in September and October — before BNM opted to keep its OPR steady in November, thus created interestrate differentials that favoured Malaysian assets in terms of yields.

Coupled with Malaysia’s 2020 budget allocation that delivered a slight expansionary budget, the ringgit appreciated to 4.120 against the dollar on Nov 7.

Nov 7-December: Phase 1 deal.

The Phase 1 deal between Washington and Beijing last week, amid some level of certainty on a clean Brexit, had uplifted investors sentiment and by virtue of that, the ringgit.

Key components of the Phase 1 US-China trade deal entail the rollback of some current trade tariffs to lift market sentiment, but larger concerns remain over the pace of global economic growth next year.

Thus, the outlook for the Malaysian currency remains challenged on several fronts, while continued uncertainty in Malaysia’s political environment centred on the succession of the country’s premiership remains a key risk factor.