Regional currencies continue to slump on Trump

KUCHING: Currencies of emerging markets – particularly the ringgit – continue to suffer as foreign funds pulled out from these markets.

Malaysia’s ringgit jumped on Monday in offshore markets after the central bank on Saturday said it would “re-enforce” existing rules that prohibit facilitation of offshore trading of the currency.

According to data from Reuters, the ringgit one-month non-deliverable forward (NDF) rose almost two per cent to 4.3790 per dollar in thin liquidity.  On Friday, one-month NDFs fell to their weakest in at least 12 years on Friday.

The NDFs jump on Monday compared with spot ringgit hitting a near 10-month low on falls in Malaysia’s stocks and bond prices.  Researchers with MIDF Amanah Investment Bank Bhd (MIDF Research) believed that emerging markets’ currencies suffered last week as foreign funds continued to pull out fromthese markets.

The ringgit was the worst performing Asian currency last week, it observed, losing 3.3 per cent.

“The weakening currencies of Asian countries was a result of emerging nations which felt the brunt of Trump’s election, as investors price in a higher risk-free interest rates,” it highlighted in a report yesterday.

Meanwhile, Affin Hwang Asset Management Bhd’s fixed income portfolio manager Sean Ramsey Lee said the ringgit lost approximately two per cent week-on-week against a strong US Dollar following Donald Trump’s surprise win in the US Presidential Elections.

“This was not just a Malaysian phenomenon, as a risk-off sentiment shockwave was sent globally, hurting emerging market currencies as markets attempted to assess the impact of the next US president’s pro-growth fiscal policies coupled with his intention for stricter trade deals,” he said in a statement.

To note, the US Treasury yield curve began steepening at a rapid pace as investors’ expectations were stoked by expansionary fiscal policy taking over from what has been a loose monetary policy for the longest time.

The 10-year UST yield rose to 2.15 per cent – a move of more than 40 basis points in the two days following the results of the elections.

“Within the same time frame, we have seen Malaysian bond yields rise by almost 30bps across the curve, practically mirroring the movement in USTs,” Lee added.

“After having seen strong foreign participation into the local bond market over the year, we noted foreign selling interest this time around. We think that these movements are dictated by the unwinding of the carry trade, of which there is heavy and profitable positioning through the year.

“Though still unquantifiable at the time of writing, the outflows from the bond market has exacerbated the weakness in the Ringgit as investors reduced their positions in both the bond market and our local currency.”

Moving forward, Lee said the ringgit as with other EM currencies will continue to play hostage towards the US dollar strength and rising US rates as the market monitors and digests Trump’s speeches and actions.

“Ultimately, the onus would now turn towards how global central banks respond to the threat posed towards their currencies as the year draws to a close and market liquidity worsens,” he estimated.

“Our defensive stance is maintained for the interim across our fixed income portfolios. We intend to stay vigilant on market developments, and upon sensing a calm in the market, we will look to redeploy cash into bonds.”

Meanwhile, Philip Futures Sdn Bhd derivatives analyst David Ng noted that risk appetite has retraced slightly following an apparently conciliatory speech by Trump.

“Helped by a Republican Congress and Senate, Trump may be able to enact a significant portion of his campaign policy agenda.

Trump has repeatedly stated that he would instruct his Treasury Secretary to label China a currency manipulator and that he would support a 45 per cent tariff on Chinese exports to the US. Should these statements be converted to policy, such measures could have significant consequences for China and Asia.

“The countries in Asia with the biggest trade surpluses with the US, namely China, Japan and Korea, could potentially be the biggest targets. Even if the US does not rescind current trade agreements with Asia, US trade policy under Trump could turn less conducive for trade with the region.”

Ng believed any growth impact on North Asia would likely first be seen through external trade, while the South East Asian economies could experience some slowdown later on negative effects from slowing trade flows.

“A potential slowdown may also be possible in remittances flows,” he added. “We expect Asia credit to trade similar to other risk assets initially. Thereafter, we think Asia ex-China would trade with some correlation to US Treasuries – ending the year broadly flat.”

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