Political clouds continue to hover over the ringgit

In addition, external factors in the form of higher US yields is strengthening the US dollar and sullying the landscape further

by NUR HAZIQAH A MALEK / pic by BLOOMBERG

POLITICAL risks continue to hang over the ringgit’s outlook despite the expansionary budget announced last Friday, and despite the local currency outperforming safe-haven currencies.

AxiCorp Financial Services Pte Ltd chief global market strategist Stephen Innes said in addition to ongoing political uncertainty, external factors in the form of higher US yields is strengthening the US dollar and sullying the landscape further, he told The Malaysian Reserve yesterday.

“The ringgit put on a great showing after market splurged on the vaccine news, which should eventually be a game-changing panacea for oil exporters,” he said.

Innes noted that the US dollar/ yuan exchange-rate reversed lower from overnight highs, but saw decent support at the 6.6000 level yesterday morning.

“I think this is due to the Trump uncertainty over the next few months,” he said.

Meanwhile, China’s inflation moderates on the back of lower pork prices, with a silver lining there is a good chance its consumer price index reading may turn negative in the coming months.

Innes said, initially, the US dollar rates gapped higher on the open but have been trading in a tight range.

“As one would expect after an explosive night in the US Treasury (UST) market, opinions seem to be divided among the customers we talk to, with some thinking the vaccine is a game-changer,” he said.

He added that in the foreign exchange and precious metals market, the safe havens (Japanese yen, Swiss franc and gold) are underperforming, while emerging markets (EMs) are outperforming.

“There is a risk that higher US yields drive a stronger US dollar. However, US rates volatility is a greater deterrent to EMs assets than a steeper UST curve,” he said.

He added that the US rates volume remains very contained, with the MOVE index still on low volume since 2018.

“Moreover, foreign-exchange differentiation should evolve from tech-driven and ‘test-and-trace’ outperformance to buying assets of economies where domestic demand and tourist income have been ravaged.

“EM currencies of economies that have suffered severe contractions in GDP this year and loss in tourism income look set to outperform North Asian currencies,” he said.