Ringgit outlook tied to rate cuts, Trump win

SPI Asset Management MD Innes pointed out that Asia’s forex market could face significant challenges if Donald Trump wins the upcoming US elections.

PETALING JAYA: The Federal Reserve’s (Fed) decision on interest rates this week could drive the ringgit, but a potential Donald Trump win in the upcoming United States elections adds a layer of uncertainty to the outlook for Malaysia’s currency.

SPI Asset Management managing director Stephen Innes has ruled out the possibility of the Fed holding off on a rate adjustment tomorrow.

Innes highlighted that whether the Fed opts for a 25-basis-point (bps) or 50-bps cut, the dot plot and forward guidance will be key drivers for currency movements.

“If the Fed’s outlook isn’t as dovish as the 250-bps cut that bond markets are pricing in, we could see US yields climb. In that case, even with a short-term dollar sell-off, the dollar-ringgit pair might return to where it started,” he noted in a reply to StarBiz.

The local unit closed at a 19-month high of RM4.267 yesterday ahead of the Fed decision. The dot plot is a visual representation of where top Fed policymakers think the key federal funds rate is headed.

With the market pricing in a 70% chance of a 50-bps cut, Innes said the dollar should initially weaken if the Fed follows through.

Similarly, OCBC foreign-exchange (forex)strategist Christopher Wong said while the magnitude of the Fed’s cut may impact US dollar movements in the short term, the Fed’s commentary and dot plot guidance will likely have a more lasting effect on the currency market.

“The dot plot will offer a reality check on market expectations regarding the rate cut trajectory,” he said. Moreover, he said the global growth momentum during which rate cuts are administered matters.

If the Fed’s cut is not driven by recession fears and global growth outside the US remains stable, Wong said the US dollar may stay weak, allowing other currencies, such as the ringgit, South Korean won and Thai baht to perform better.

This is currently the base case scenario, according to him. Conversely, if the Fed move is in response to a major global recession or crisis affecting global growth or risk appetite, safe-haven currencies like the Swiss franc, Japanese yen and even the US dollar may find support, potentially leading to a weaker ringgit, he warned.

“Given that markets have largely priced in a dovish Fed, the scenario where the Fed keeps rates unchanged may force a sharp unwinding of US dollar shorts, and this may imply a sharp snapback on the US dollar-ringgit pair to the upside,” he added.

Innes pointed out that Asia’s forex market could face significant challenges if Donald Trump wins the upcoming US elections.

He pointed out that despite a close popular vote, recent electoral college forecasts suggest Trump is leading by a wide margin, especially in key swing states.

“If he does (win), his first move will likely be slapping tariffs on China, which could send the global economy – particularly China – into a deeper tailspin. That would spell trouble for the ringgit,” Innes said. He further explained the front-loaded dovishness is piling on pressure for the dollar.

The key question now for the forex market is whether the Fed will continue with aggressive rate cuts or ease off, potentially jolting bond markets.

“This is the crux of the situation: will the Fed steer rates toward 3% or lower over the next year, or will they remain bound by a data-dependent approach?” Innes said.

He said how the bond market reacts to the shifts in yield expectations will be crucial, especially for short-term currency movements.

Meanwhile, Wong opined the recent gains in the ringgit were due to market pricing in a larger-than-expected Fed cut.

“The revival in market confidence to re-price for a 50-bps cut can be attributed to initial jobless claims data (which rose again) and a media article on the Fed’s rate cut dilemma,” he noted.

Wong referred to an article featuring Jon Faust, a former adviser to Fed chair Jerome Powell, who suggested that while the health of the US economy does not necessarily call for a pre-emptive 50 bps cut, his preference would be to start with such a move.

Faust added the Fed could manage concerns about spooking investors by providing extensive communication around the cut, making it less alarming.