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Yuan Weighs On Ringgit

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PETALING JAYA: The selldown in the ringgit, despite the relative stability in crude oil prices and the broad US dollar weakness, is due to the impact of the depreciating yuan on the Malaysian currency.

Continuing its slide for the fourth consecutive day, the ringgit yesterday weakened past the psychological level of RM4 per US dollar for the first time in more than a month.

It fell 0.31% against the US dollar to end at 4.0078, which was its weakest closing against the greenback since March 29.

This was despite global crude oil prices stabilising above US$45 per barrel, which should alleviate concerns over the fiscal position of Malaysia as an oil and gas-driven economy. It was also against the downtrend of the US dollar index – a gauge of the greenback’s performance against a basket of major currencies such as the euro, yen and pound sterling – which fell to its 15-month low of 92.63 early this week before rebounding to 93.55 yesterday.

According to analysts, fears of China’s currency policy move had become the major culprit driving the ringgit’s decline over the last few days.

“The yuan has been the biggest mover of the currency market in recent days,” CIMB Investment Bank director of regional fixed-income research Nik Ahmad Mukharriz Nik Muhammad said.

“We expect regional currencies, including the ringgit, to remain under pressure for the time being due to the cautious sentiment of investors,” he told StarBiz.

An analyst with a local bank concurred, saying: “Investor sentiment towards Asian currencies in general has turned increasingly sour – but more so for the ringgit – because of growing fears that China would devalue its currency further to boost its exports and economic growth.

“Within the region, Malaysia is among the countries that have the highest exposure to China in terms of exports, and, based on historical trends, it also appears to be the most vulnerable to the yuan’s weakness,” he explained, noting the positive correlation between the yuan and Asian currencies.

The yuan has lost about 0.5% against the US dollar since the beginning of the week.

More significantly, the People’s Bank of China (PBoC) yesterday devalued the Chinese currency for a second straight day.

The PBoC cut the yuan’s daily fixing rate by 0.28% to 6.5128 per US dollar – which was the lowest level since March 28 – after lowering the currency’s reference rate on Wednesday by the most in more than eight months.

“Recent moves of the ringgit have somewhat deviated from tracking the performances of crude oil prices and the US dollar,” independent foreign exchange (forex) strategist Suresh Ramanathan pointed out.

“Instead, the ringgit is now closely tracking the movement of the yuan,” he said, noting that investors had started pulling out from ringgit-denominated assets.

Shares on Bursa Malaysia fell, with the benchmark FTSE Bursa Malaysia KL Composite Index (FBM KLCI) closing 12.49 points, or 0.75%, lower at 1,645.09, which was off an intra-day low of 1,637.41.

In the bond market, yields of the Malaysian Government Securities (MGS) with 10-year tenure was relatively unchanged at 3.88, while yields for both the five-year and seven-year MGS rose 2.4 basis points to around 3.44 and 3.81, respectively.

Meanwhile, the Singapore-based forex research team at Malayan Banking Bhd (Maybank), led by Saktiandi Supaat, said there was a risk of the ringgit weakening to 4.07 against the US dollar, as foreign-currency carry trades continued to unwind.

“Forex volatility has rebounded and forex markets have seen abrupt moves over the past week or so. We see this move more as an unwinding of foreign-currency carry trades,” Maybank’s forex team said in its report.

“We believe this unwinding of carry trades may continue over the next few weeks, as volatility is expected to pick up further,” it added.

According to Maybank, the market in general was still not pricing in any interest rate hike by the US Federal Reserve in the coming two months.

“Our house view continues to look for a 25-basis-point hike in June. This suggests that a repricing of expectations could lead to US dollar strength,” the financial institution said.

Despite the ringgit’s decline over the past few days, the Malaysian currency remains the second top-performing currency in Asia after the Japanese yen, with a year-to-date gain of around 7.2%.

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