The virus weighs on the ringgit

The local currency likely to move to 4.075 against the greenback on the coronavirus and short-term economic shocks

by PRIYA VASU/ pic by TMR GRAPHIC

THE coronavirus and short-term economic shocks would weigh on the ringgit with the local unit likely to move to 4.075 against the greenback.

The ringgit had strengthened to about 4.05 last month before the coronavirus outbreak in China. AxiCorp Financial Services Pte Ltd chief market strategist Stephen Innes said the coronavirus, which has killed more than 300 people and infected another 14,000 individuals, continues to wreak havoc in global markets, especially countries with strong financial and trade relations with the world’s second-largest economy.

“Predictably, it’s been a bit of a struggle for the ringgit this week, but the sell-off is pricing way too much negativity. But when fear takes over markets, trader are quick to throw their rational caps out the window,” he said.

Markets are worried that the virus outbreak would slash demands in the world’s most populous nation. A drop in demand in a country with an almost 1.4 billion population will send shockwaves across the globe.

Commodity-revenue driven economies like Malaysia will be at the most disadvantageous position if the currency weakens, Innes said.

Worries were further heightened after the World Health Organisation’s (WHO) announcement that the outbreak has become a “public health emergency”.

“Over hedged positions have continued to unwind, but the market is left with the struggle to quantify the economic impact of the coronavirus.

“Yet, for now, the market’s risk lights have shifted from flickering on red to a steady shade of amber, which could bring more risk back into play,” he added.

Crude palm oil and crude oil prices have also tumbled following the outbreak, which started early last month. OPEC will discuss a possible cut in oil production due to the anticipated lower demand from China.

“While it’s virtually impossible to quantify the full extent of the demand destruction from the virus outbreak, if there is one asset class more oversold than others, it has to be oil, given the bigger than life global supply overhang.

“Saudi Arabia is reportedly open to discussions about moving a planned OPEC meeting to early February from March to coordinate action and counter the oil price
slide. In the wake of the WHO’s softer decree, the market will likely now view OPEC’s compliance efforts in a more constructive light as the negative sentiment’s snowball effect from the coronavirus gets temporarily kicked to the curb,” Innes said.

Brent oil price rose slightly to US$57.61 (RM236.01) last Friday, while CPO was traded at RM2,599.

But he said there could be light at the end of the tunnel if the Chinese health authorities could contain the spread in the next few weeks.

“If the spread starts to slow next week, which I expect, (then) the carry trade returns, it would be good for the ringgit.

“Manufacturing and commodity exporters could see pent-up demand rebound later in the year, especially for South Korea, Malaysia and Australia. So, if things quickly deescalate on the virus front, the won, the ringgit and the Aussie dollar are my three picks for next week,” he said.