Ringgit, yuan face weakening trend


Despite surging global commodity prices, and improving global economy and trade outlook, the local currency took a hit from rising domestic Covid cases, slow vaccination speed and domestic political uncertainties with the pace of economy recovery weighed down by the impact of MCO 2.0 (January–February 2021).

THE ringgit started 2021 strongly at RM4.02 against the dollar. However, by end-May 2021, the ringgit had depreciated by 2.6% to 4.12, its eight-month low since October 2020.

Despite surging global commodity prices, and improving global economy and trade outlook, the local currency took a hit from rising domestic Covid cases, slow vaccination speed and domestic political uncertainties with the pace of economy recovery weighed down by the impact of MCO 2.0 (January–February 2021).

Meanwhile, the yuan which started at 6.53 yuan against the dollar, reached its three-year high (since June 2018) of 6.37 yuan against the dollar, translating to a 2.5% appreciation by the end of May 2021.

This was amidst surging global commodity prices and raised suspicion that the People’s Bank of China (PBoC) had deliberately used the yuan depreciation earlier to curtail rocketing imports.

Due to the tight correlation between both currencies and the dollar of around 0.64%, the ringgit fell by 4.7% against the yuan between January and end-May.

The ringgit and yuan exchange rate hovered between 0.62 and 0.65 during the period.

Ringgit, yuan losing strength

However, the trend for both the ringgit and yuan had turned negative since end-May 2021.

From early June until Sept 3, the ringgit had dropped by 0.5% to RM4.15 against the dollar, while the yuan fell by 1.2% to 6.46 yuan against the dollar.

The drag on both currencies was due to the change in the dollar outlook.

The dollar’s strength is partly due to growing expectations that the United States Federal Reserve (Fed) will announce the tapering of its asset purchases.

We expect the Fed would announce tapering in November. It would give Fed enough time to digest the macro data on labour market’s recovery and economic growth.

If the incoming data remains good, we expect tapering to start in December this year. But if the data is not strong enough over the next two months, we foresee the Fed moving its tapering timeline to the first quarter of 2022.

On the policy rate, a promising incoming data would allow the Fed to start raising its rates as early as the fourth quarter of 2022.

Otherwise, we expect rates to be revised upwards in 2023, factoring in two rate hikes, each by 25 basis points from its record low policy rate of 0%–0.25%.

And we believe the financial markets would be able to absorb the Fed’s tapering without much volatility. Any concern will only come about should there be persistent market unrest and spills into the real economy.

However, market fears will arise if the Fed’s direction with regard to the unwinding of its US$120bil (RM506bil) worth of monthly bond purchases remains unclear.

Will the Fed follow the post-Great Recession playbook i.e. to first cut back Treasury purchases or will it cut mortgage-backed securities first to calm a red-hot housing market.

Meanwhile, the economic recovery from the pandemic is expected to be more rapid than previously expected.

And the Fed could reach its dual mandate of 2% inflation and maximum sustainable employment much sooner.

We project the gross domestic product (GDP) to grow by 7.0% and 4.5% with inflation at 3.0% and 2.0% for 2021 and 2022 respectively.

As for the yuan, its climb was truncated after the PBoC announced a rare hike of the foreign deposit reserve requirement ratio by 2% on May 31.

The hike clearly signalled the PBoC’s intention of limiting the fast appreciation of the yuan exchange rate.

Also, the dollar which has a strong correlation with the yuan, has picked up pace since end-May.

This resulted in the yuan depreciating quickly against the dollar, falling to 6.46 yuan as of Sept 3, about 1.2% below its previous low of 6.38 yuan.

Meanwhile, the ringgit fell against the dollar due to the rising number of Covid-19 cases which resulted in the movement control order (MCO) despite the increasing speed of vaccination.

It disrupted the gradual economic recovery, pushing the economy back into a negative growth in the third quarter of 2021 and dashing hopes of a modest recovery in the fourth quarter of 2021.

We have lowered our 2021 GDP to 3.0%–3.5% with a downside at 1.5%.

Will yuan enjoy the appreciation against the dollar again?

To recap, during the first five months of the Covid-19 pandemic in 2020, the yuan tumbled 2.49% against the dollar to a deep trough of 7.14 yuan in May 2020, as China bore the brunt of the unprecedented pandemic, on top of escalating China-US tensions.

The ringgit plunged by 6.25% to a low of RM4.35 against the dollar, while against the yuan, the local currency depreciated by 3.67% to 0.61. During this period the dollar index rose 1.97% to 98.34.

From May 2020 till May 2021, the yuan gained strength, jumping 10.6% to reach 6.37 yuan against the dollar supported by macro fundamentals.

During this period, the ringgit appreciated by 4.5% to RM4.12 against the dollar. But against the yuan, the ringgit fell by 6.5% to RM0.645.

Nevertheless, the macro fundamentals that supported the yuan are not sustainable due to growth divergence as China’s “first-in-first-out” of the pandemic is expected to ease from global recovery; the dollar would strengthen in 2021 from the Fed’s potential tapering; gradual ease of trade balance and current account surplus will weigh on the yuan’s rise.

Exports, although strong, would lose momentum when global GDP normalises, though it may take time.

Also, the services trade deficit (which is due to almost zero outbound tourism, and other related factors in 2020) will gradually rev up as more countries start to open their borders to support their tourism sector; and the recent surge of commodity prices compared to domestic pent-up demand increases import values.

Besides macro fundamentals, the China-US relations, global capital flows, China’s policy reforms and credit crunch regulations, and the PBoC’s policy intentions on the exchange rate will need to be carefully evaluated.

We expect a depreciation trend in the yuan against the dollar as we thread into the remaining months of 2021. The pair will likely hover around 6.45–6.55 yuan levels and with room to reach 6.65–6.80 yuan by end-2021.

Ringgit expected to remain soft against dollar

Looking ahead, the ringgit’s outlook against the dollar is seen to come under slight downward pressure driven by a downgrade of 2021 GDP growth to 3.0%–3.5% due to the rise in local Covid-19 cases despite increasing vaccinations.

It will sharply lower the second half of 2021 GDP to 0%–0.5% from 7.1% year-on-year in the first half of 2021.

Also, the government’s plan to widen the budget deficit to 6.5% to 7% of GDP from the initial estimate of 6.0% would mean the statutory debt limit will be raised from 60% to 65% of GDP; and domestic political noises pending the 15th General Election, which means investors will remain cautious on future debt ratings, added with the risk of being downgraded.

However, the weakening trend of the ringgit could be softened under the following circumstances; a reopening of the economy by the end of October, where all states transition to phase three of the National Recovery Plan (NRP) and phase four by November after Malaysia inoculates its entire adult population.Also a favourable external demand environment, supportive economic policies and a gradual improvement of domestic demand that would help steer the economy into recovery in 2022 are also factors to be taken into account.

The political stability that boosts consumer, business and investors sentiments, effective implementation of policies and clearer standard operating procedures that will improve mobility, pent-up demand and business expansion will also play a part, which will reduce stress on the labour market.

Besides macro fundamentals and political stability, global capital flows, domestic policy reforms, policies after the rollback of stimulus measures, credit crunch, bankruptcies/delinquencies, unanticipated provisions and Bank Negara’s policy intentions on the exchange rate will also need to be carefully considered and evaluated.

We expect the ringgit to continue its depreciation trend against the dollar in the remaining months of 2021. It will likely range from RM4.15 to RM4.20 levels and with room to reach RM4.30 by end-2021.

For FX enquiries, contact: ambank-fx-research@ambankgroup.com

For Fixed Income enquiries, contact: bond-research@ambankgroup.com

How will the ringgit trend against yuan?

To answer this, we took into consideration the behaviour of the yuan and ringgit against the dollar, given that both have strong correlation with the dollar. Some yuan appreciation against the dollar might help to contain inflation arising from increasing commodity prices and supply-chain bottlenecks. And there is some evidence that suggest heavily indebted Chinese companies will take the opportunity to pay down their dollar-denominated debts.

But such benefits come with risks. A stronger currency will result in smaller yuan-denominated revenue for exporters and can exacerbate the financial fragility of China, where public and private debt exceeds 300% of the GDP. And there are worries that too rapid an appreciation could spark a destabilising of capital inflows or outflows. Managing the fallout from the Fed’s weak dollar policy could also expose China to trade retaliation from the US. These are dangers coming from their credit-fuelled policy mistakes.

Besides China’s macro fundamentals, the China-US relations, global capital flows, China’s policy reforms, credit crunch regulations, and the PBoC’s policy intentions on the exchange rate will need to be carefully evaluated. All points towards a weakening yuan to hover around 6.45-6.55 yuan with the upside at 6.65-6.80 yuan by the end 2021.

In the case of Malaysia, the underlying logic is quite straightforward. Besides macro fundamentals, domestic political uncertainties, economic blowouts due to the pandemic that led to MCO 3.0; the speed of vaccinations; uneven recovery; business sustainability, risk of ratings downgrade from ballooning fiscal deficit and public debt, global capital flows from Fed’s tapering, policy reforms, bankruptcies, high provisioning, household debt and retirement crisis, and Bank Negara’s policy intentions on the exchange rate will weigh on the ringgit. We reiterate our ringgit outlook to the dollar at RM4.15-RM4.20 with the upside at RM4.30 by the end of 2021.

With both the ringgit and yuan seen to be on a weakening trend against the dollar, we expect the ringgit and yuan to hover around the 0.63–0.66 levels for 2021 with the upside to 0.66 should the ringgit weaken, which is far more significant compared to the yuan against the dollar. The downside of the yuan and ringgit will be close to 0.63 on the assumption that the yuan weakens more than ringgit against the dollar.

For FX enquiries, contact: ambank-fx-research@ambankgroup.com

For Fixed Income enquiries, contact: bond-research@ambankgroup.com

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