Slower growth in China will have a broad-based impact on Asean economies as supply chain disruptions affect exports

by PRIYA VASU/ pic by BLOOMBERG

THE ringgit fell to the lowest level this year as mounting fears of the Covid-19 rattles markets and investors flee to save havens like the dollar.

The local unit closed at RM4.18 yesterday against the greenback. This year alone, the ringgit has shed 2.22% of its value while the dollar rose by 2.5%.

The local unit last rose to RM4.05 against the dollar in mid-January 2020, but the Covid-19 hit the ringgit hard.

Mounting economic growth concern in China that has been caused by the coronavirus outbreak has pushed the currencies into a tailspin.

“It looked like a gnarly day for the ringgit right out for the gates amid mounting economic concern from China. And now with Japan about to hit the skids, the question is who’s next?” said AxiCorp Financial Services Pte Ltd chief market strategist Stephen Innes.

The flu outbreak continues to disrupt global markets, especially countries with strong financial and trade relations with the world’s second-largest economy.

“Slower growth in China will have a broad-based impact on Asean economies as supply chain disruptions affect exports while commodity dislocations weigh on inflation.

“The yuan has not been a significant underperformer until today as it seems like a reality check of sorts is hitting. Yuan markets are blissfully ignoring a lot of economic negativity,” said Innes.

He said the uncertainties over the Japanese economy that is teetering closer to recession further fuel the ringgit’s drop. The yen is also dropping over the health of Japan’s economy.

“I’m incredibly concerned that the yen is declining not because Japanese portfolio managers have decided the US offers such an attractive place to park cash but because they are selling yen due to the poor economic prospects in Japan.

“If the US economy, which has been doing the heavy lifting for global growth the past few years, starts to sniffle from the Covid-19, the global capital market could be in a world of hurt,” he said.

Innes said although life is coming back to normalcy in China with over 50% of reported industrial enterprises resuming operation, many are still well below capacity due to personnel shortages, supply chain disruptions and low downstream demand.

“But with the daily contagion rate outside of Hubei slowing more sharply in recent days, this will provide a significant sentiment boost to a multitude of cross assets,” said Innes.

Oanda Corp Asia-Pacific senior market analyst Jeffrey Halley said the ringgit’s misfortune was largely due to the ripple effect of the yen’s performance.

“The strength in the dollar overnight allowed the Singapore dollar to ease as well. The dollar is very strong today and I suspect the fall in Asian currencies has been driven by the overnight fall in the yen,” said Halley.

Japan, the world’s third-largest economy contracted 6.3% in the final three months of 2019, fuelling the speculation that the country is heading for a recession this year.