The State of the Nation: Ringgit volatility to continue as trade tensions persist

This article first appeared in The Edge Malaysia Weekly, on September 9, 2019 - September 15, 2019.
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THE more recent weakness of the ringgit — it dropped to a two-year low of 4.22 against the US dollar last Tuesday — has been in tandem with most currencies globally, fuelled by various factors. This time, the subdued Brent crude price is not entirely to blame for the ringgit’s decline.

Over the past year, Brent crude prices have fallen 21.47% to US$60.68 per barrel on Sept 5. Expectations are for Brent to trade within the US$55 to US$60 per barrel range until end-2019. For most of this year, Brent has been trading above US$55 per barrel.

“The ongoing US and China trade dispute continues to weigh on global growth expectations, particularly in the region — Malaysia, for example, which are heavy exporters to China. The US is benefitting from its high interest rates vis-à-vis the G10 and inflows into its bond market,” says OANDA Corp senior market analyst for Asia-Pacific Jeffrey Halley.

The G10 is a grouping of 11 industrialised nations that meet regularly to consult on international financial matters. The member countries are Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, the UK and the US, with Switzerland playing a minor role.

FXTM market analyst Han Tan says the strength of the US dollar and a weaker yuan have also weighed down the ringgit, along with other regional currencies, given Asia’s reliance on China.

“Such extraneous factors are beyond Malaysia’s control and are affecting a swathe of emerging-market currencies,” says Tan.

Among Asian currencies, the ringgit is not the worst performer this year. Year to date (until Sept 4), the ringgit has shed only 1.42% against the greenback. The South Korean won was the worst hit, declining 7.02% since the beginning of the year. The baht was the best performer in the region, appreciating 6.48%.

“The ringgit has declined 1.42% against the US dollar in 2019, which is less than the YTD losses of the won, the Indian rupee, the yuan and the Singapore dollar. Malaysia’s economic fundamentals are holding up despite the external headwinds, as evidenced by the 4.9% second-quarter gross domestic product print,” he adds.

The ringgit rebounded slightly, and by last Thursday, was trading at 4.19 against the greenback. Many say this can be attributed to the rebound of the July export numbers, which grew 1.7% year on year after a contraction of 3.4% in June.

United Overseas Bank (M) Bhd economist Julia Goh says in a Sept 4 research report that the export turnaround was a positive surprise as Bloomberg’s consensus estimate was for a decline of 2.5%.

Export growth in July was largely lifted by higher shipments of manufactured goods, especially the electrical and electronic sector, refined petroleum, machinery and equipment as well as chemicals and chemical products.

LNG exports also helped to partially offset a steep fall in exports of crude petroleum, says Goh in her report.

The July trade surplus of RM14.3 billion was larger than the RM10.5 billion in June, as imports declined 5.9% in July year on year.

While the positive trade numbers may indicate that Malaysia is weathering the US-China trade dispute, the economy and the ringgit can expect to see continued volatility as the two economic powerhouses continue their trade war.

OANDA Corp’s Halley believes the ringgit and other regional currencies that have “high-beta” to world trade will continue to be buffeted until there is concrete progress by both sides in the trade dispute.

Tan shares a similar view, saying that while the ringgit has been among the less volatile currencies in the region in recent months, compared with the rupee, won and rupiah, Asian currencies in general are likely to see further bouts of volatility as markets remain skittish over any further escalation in US-China trade tensions.

It is worth noting that despite the 25-basis-point rate cut by the US Federal Reserve in July — the first cut since December 2008 — the US dollar has continued to gain strength against other currencies.

The US dollar gain, says Tan, has been driven by the fact that the US economy is performing better than its major developed-economy peers.

“In the second quarter, the US economy grew 2%, compared to the economic contraction seen in the UK and Germany in the same period,” says Tan.

Halley adds that among the other G10 countries, the US still has the highest interest rates even after the recent rate cut as other central banks had started easing long before the Fed got involved. “Hence, even though the Fed may be commencing an easing bias, the US dollar will stay strong as a risk-free high yielder, bringing inflows to its bond market.”

The contrast between the US’ economic performance and higher interest rates compared with its developed-economy peers is giving the US dollar bulls every opportunity to send the greenback higher, says Tan, even in the face of the Fed’s dovish stance. “However, if the Fed were to be prompted to lower US interest rates more aggressively, that could see the US dollar giving up some of its recent gains.”

Back home, the Monetary Policy Committee will be meeting this Thursday, before its last meeting of the year in November. Many are expecting to see another 25bps cut this year as central banks globally ease policy.

Would another rate cut further weaken the ringgit?

“Malaysia is expected to lower the benchmark interest rate again this year, given the growing external downside risks. Another overnight policy rate (OPR) cut in and of itself would not have a significant impact on the ringgit, depending on the timing, given that it would be in line with the easing stance by central bankers around the world. Lower interest rates in Malaysia would ensure that the domestic economy remains resilient, which should help support the ringgit’s performance,” says Tan.

Similarly, Halley expects Bank Negara Malaysia to join the other central banks in adopting an easing monetary policy. He adds that this is especially important for Malaysia given that the government has little wiggle room when it comes to enacting fiscal stimulus on a large scale.

Halley says the ringgit would be impacted only if a larger and more aggressive easing happens. “But far more important will be global growth and whether the strength of the US dollar will persist for the rest of the year, which I believe will be the case. In that scenario, the ringgit should continue to depreciate moderately along with its regional counterparts.”

Based on Bloomberg consensus, the ringgit is forecast to average 4.18 against the US dollar in the fourth quarter.


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