Failure to pass the budget may engulf local markets and local note in a cloud of risk aversion
by SHAHEERA AZNAM SHAH / pic by BLOOMBERG
CURRENCY traders tracking the US dollar/ringgit trade will be closely tracking the consensus vote on Budget 2021 this week coupled with the development of new Covid-19 cases to provide trading leads as funds flow into cyclical counters on the local bourse.
Oanda Corp Asia-Pacific senior market analyst Jeffrey Halley said should there be any positive outcomes from the two circumstances, it would influence the local currency and stocks, and possibly support the local unit to strengthen further and test the 4.05 level after closing the week at a 10-month high of 4.09 last Friday.
“Two local factors will influence Malaysian stocks and the ringgit in the short term. The upcoming parliamentary vote to pass the 2021 budget is the first major hurdle.
“If the vote fails, that will negatively weigh on the stock market and the currency as political uncertainty returns to Malaysia with a vengeance.
“Secondly, the trajectory of Covid-19 infections. If cases start to fall rapidly, that should be a bullish driver for both,” he told The Malaysian Reserve.
However, if the infection spike continues, it will act as a drag on the domestic economy which is already in recession, Halley said.
MPs are scheduled to vote on the country’s biggest budget of RM322.5 billion on Wednesday.
The ringgit was able to capitalise on the risk-on tone last week partly helped by the Regional Comprehensive Economic Partnership (RCEP) trade deal and rising energy prices, but that could all be jeopardised by an unsuccessful consensus vote on Budget 2021.
“Failure to pass the budget may engulf Malaysian markets in a cloud of risk aversion,” Han Tan of FXTM warned.
Foreign-exchange markets are now more focused on the dollar and positives emerging currencies.
Halley said the greenback is facing depreciating forces led by market expectations of a ramped up quantitative easing to lower US unemployment and avoid a deeper recession.
The fall of the greenback due to the extensive execution of monetary policy is expected to provide a boost to Asian currencies such as the ringgit, he added.
“Local factors aside, the split between the US Federal Reserve (Fed) and the Treasury Department over the extension of business support measures under the Cares (coronavirus aid, relief and economic security) Act means that the Fed will almost certainly ramp up quantitative easing at their upcoming December meeting.
“That will be negative for the dollar which is expected to fall all the way through 2021,” he said.
US President Donald Trump had passed a US$2.2 trillion (RM9 trillion) financial relief package in the earlier stage of the Covid-19 pandemic, namely the Cares Act, to ease the downturn implications to the economic giant.
However, the monetary assistance is set to end on Dec 26, 2020, which will leave millions of American without unemployment benefits.
By year-end, Halley expects the dollar/ringgit pair to have fallen through 4.00 and possibly as far as 3.90.
Tan added that investors will continue to monitor the health response out of major economies, and a further sign of the pandemic’s grip may dampen risk-taking activities.
A slew of positive surprises on economic data this week could increase hopes that the global economic recovery remains intact despite the rising infection numbers.
“Markets will also be keenly awaiting the identity of the next US Treasury secretary with President-elect Joe Biden having revealed he has already made his selection. With the US economy clearly in need of more financial stimulus, investors will assess how closely aligned the next Treasury secretary will be with the policy bias within Congress in determining the near-term US fiscal response to the pandemic,” Tan said. As for the monetary policy response, more clues may be gleamed from the incoming Federal Open Market Committee meeting minutes, he added.
Meanwhile, Haley expects the FTSE Bursa Malaysia (FBM) KLCI to chart a continuous recovery as investors gravitate towards blue chips supported by the Covid-19 vaccine newsflow.
“The benchmark FBM KLCI’s relative performance depends on the evolution of the Covid-19 vaccine situation.
“If a number of vaccines is rapidly approved by the end of the year or in January next year, the rotation trade from technology to cyclical growth industries should accelerate.
“The index — which is heavy in legacy industries and sectors, and very light in technology — should outperform its regional peers except for Singapore and Indonesia,” he said.
He added that should the vaccine race drag on well into early next year, the local benchmark will continue to rise, but underperform against China, Taiwan, South Korea, Japan and the US — countries with more world-class technology companies.
Read our earlier report