The holiday-shortened week leaves the ringgit more exposed to the influence of extraneous factors

by ALIFAH ZAINUDDIN / pic by BLOOMBERG

THE ringgit faces downside risks against the US dollar as concerns rise that the coronavirus outbreak may dampen market appetite although currency markets globally remain muted.

FXTM market analyst Han Tan, in his weekly note, stated that Malaysia’s light economic data calendar in the holiday-shortened week leaves the ringgit more exposed to the influence of extraneous factors.

“Should concerns over the coronavirus outbreak continue to dampen risk appetite, the ringgit could retrace towards the 4.10 psychological level against the US dollar. In the other direction, support for the currency pair should arrive around the 4.05 region,” he said.

The ringgit, however, continued to be stable last Friday, hovering just below the 4.07 level after Bank Negara Malaysia announced a preemptive Overnight Policy Rate (OPR) cut to its lowest since March 2011.

AxiTrader Asia-Pacific market strategist Stephen Innes said the central bank’s move has helped trigger a strong demand for duration in the bond market where inflows have been supportive of the ringgit so far.

He said the interest cut should provide a decent economic boost, given signs of slowing down in consumption and household spending, and could prove suitable for equity market risk if the stimulus efforts prevent growth from falling below 4%.

In the US, equity markets have continued to react at the sector level and not at the broader index level.

Innes said this is probably due to the bulk of the market risk concentrated in stocks not directly exposed to current market worries. “If the flu does spread, then the defensive macro allocation game plans will probably kick in with full force,” he said.

“My head is still spinning this morning after Chinese equity markets got hammered to the tune of over 3%. Of course, it is hard to say fears are overblown, especially when people are dying,” he said.

Innes said the mortality rate with this current infection is around 3%, compared to SARS, which was 15%, and Ebola at 70%. He believes the Chinese sell-off was a complete overreaction due to the Chinese New Year effect.

“As such, price action throughout the rest of Asia should be the better proxy to gauge risk,” Innes said in a report last Friday.

Tan said global equities have refused to buckle under the latest risk-off event so far, with the MSCI Asia-Pacific Index still boasting a year-to-date (YTD) gain, while the S&P 500 strives to mark a 3% advance YTD.

He expects investors to pore through fourth-quarter results from corporate America, while digesting further cues on the spread of coronavirus in deciding how equity markets should move in the final week of the month.

“As long as global downside risks remain subdued and with US inflation muted, the world’s most important central bank is unlikely to have enough cause to adjust its policy settings,” Tan said.

The US Federal Reserve is slated for its first policy meeting of the year, although markets currently expect US interest rates to remain unchanged at least through July.