Lead Story: Ringgit just another casualty in the currency war

This article first appeared in Capital, The Edge Malaysia Weekly, on August 12, 2019 - August 18, 2019.

Photo by Reuters

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AMID the escalating China-US trade — and now currency — war, economists caution that the ringgit will suffer some collateral damage.

The yuan is influencing the path of regional currencies due to its economic influence in the region, in particular the export markets, says, Lee Heng Guie, the executive director of the Socio-Economic Research Centre of The Associated Chinese Chambers of Commerce and Industry of Malaysia.

“Most Asian currencies are aping, tracking or correlating with the yuan’s weakness against the US dollar.

“The ringgit’s weakness will be influenced by the yuan’s sustained weakening, though Bank Negara Malaysia will track and measure the performance of the ringgit in terms of a basket of trade-weighted currencies,” he tells The Edge.

Lee says with rising global headwinds, and considerable economic uncertainties, roiling the financial and foreign exchange markets, the ringgit will remain under pressure over the next 6 to 12 months. As such, he projects the local currency will trade at  4.15 to  4.20 to the US dollar by end-2019.

As if the China-US trade war was not enough, currency tensions emerged after the yuan breached the seven level against the greenback — the first time since the 2008 global financial crisis — prompting the US Treasury to label China a currency manipulator.

Affin Hwang Investment Bank chief economist Alan Tan says the People’s Bank of China will not use currency depreciation as a tool to gain export competitiveness and to counter new tariffs by the US.

“Back in 2015, when China depreciated its currency against the US dollar, there were capital outflows from China back to US-denominated assets. [Given that scenario] we think it is highly unlikely that China will want to do a competitive devaluation of its currency now as capital outflows are not what China’s government wants today,” Tan tells The Edge.

The US dollar was equivalent to 7.0466 yuan last Thursday, a 2.4% decline from 6.8811 yuan on July 31, a day before US President Donald Trump announced a 10% tariff on the remaining US$300 billion of Chinese imports come Sept 1.

UOB Malaysia senior economist Julia Goh says Trump’s latest decision is an escalation of the firm’s worst-case scenario, which envisions that both parties are unable to reach a satisfactory resolution this year and that the US will impose a 25% tariff on the additional US$325 billion of Chinese exports to the US.

“We had ascribed a 30% probability to this worst-case scenario and warn that should this happen, China’s gross domestic product growth will likely fall below 6% in 2020 to 5.8% and that USD/CNY may threaten to break above 7.30.

“Assuming this weakness cascades across the other Asia forex, it is not difficult to expect USD/RM at 4.25 or higher in this scenario. Our current base case forecast is for USD/RM to reach 4.22 by 1Q2020,” she says.


Rate cuts everywhere

Central banks across the globe had their scissors out last week, with the Bank of New Zealand, Bank of Thailand and the Central Bank of India all trimming rates.

Tan does not expect Bank Negara Malaysia to follow suit — not this year at least.

“The rate cuts by the central banks have been in tandem with the expectation that the US Federal Reserve will cut rates in the coming months. So that provides them some flexibility [for easing]. If the Fed does cut rates, it will favour emerging markets [such as Malaysia] due the widening interest rates differential.

“However, we believe a rate cut from Bank Negara will come in the first half of next year, assuming that global growth slows further,” he says.

The Fed is widely expected to cut rates by 25 basis points next month.  



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