Firmer China economy, US-China trade deal to shore up ringgit

KUALA LUMPUR: Firmer China economic data and a possible US-China trade deal should help shore up the ringgit over the longer term though the local unit could face some headwinds over the shorter term.

Stephen Innes, managing partner and head of trading at SPI Asset Management said on Monday the “decisive economic pivot in China suggesting global growth headwinds are easing and factoring in a possible US-China trade deal, so over the long haul we should expect the Ringgit to remain supported”.

In his note to clients he expects the ringgit to piggy-back on the strengthening yuan as a China economic resurgence will have a prosperous effect across all Asean economies.

To recap, the ringgit came under pressure following the move by the Norwegian sovereign fund to exit Malaysian bonds coupled with the FTSE Russell possible exclusion.

Norway's sovereign wealth fund, the world's largest, had announced it was streamlining its US$300bil fixed-income portfolio by cutting emerging market bonds from the benchmark index it tracks,

Investors were worried over the potential exclusion of the nation’s bonds from the FTSE World Government Bond Index, 

Innes said on Monday these factors provided a significant technical overhang for the ringgit, and when factoring a dovish Bank Negara Malaysia backdrop, it suggests the ringgit will struggle for traction and could trade with a weaker short-term bias. 

He also said foreign outflows related to Norges shifting away from EM bonds and WGBI potentially dropping Malaysia from the index perhaps got the markets nudging to the 4.15 level a bit quicker than expected. 

“The  Norges and Russel shocker aside, markets are positioning for a benign inflation print this week that should lend support to a growing chorus of calls for the Bank Negara to drop interest rates next month,” he said.

Innes pointed out that in the absence of a robust offshore ringgit market, liquidity can dry up quickly especially when foreign investors are all running for that small exit at the same time. 

“Bid to offer spreads increases dramatically which tends to exaggerate currency moves. This phenomenon is what occurred last week as Malay bonds repriced on panic fear which caused currency traders to price in a substantial premium for possible outflows. 

“But given the macro policy backdrop remain supportive, the market faded the bond market move which in turn stabilised the ringgit.

 “Nonetheless, we remain short term bearishly biased on the  ringgit as the writing does appear to be on the wall. Bank Negara has revised growth forecasts lower, benign inflation is the new norm, while the definite shift in central bank rhetoric adds more enthusiasm to the chances for a rate cut next month,” he said.


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