DONALD Trump’s shock upset in last week’s US presidential elections have triggered a massive move in the global currency markets over the past few days.
Economists and market observers have broadly interpreted his past presidential pledges as a harbinger of higher inflation in the US.
He has promised to ramp up infrastructure spending, create more jobs and incur billions of dollars in debt to spur growth. He also pledged to force corporations to repatriate overseas profits back to the US to be taxed, which would be supportive of the dollar.
This would mean a series of interest rate hikes, instead of a single hike that is forecast to happen in December.
All this means that emerging market (EM) currencies will be among the hardest hit if the dollar continues its upward trajectory, opines HSBC in a recent note.
“Cross-asset volatility is rising and is expected to rise further, suggesting a wider range of EM currencies weakening and potentially sharply so. In particular, we are now most concerned about the outlook for the higher-yielding EM currencies,” it says.
The ringgit, which is now the worst performing currency in Asia this year, was certainly not spared from the upheavals. On Friday, it fell to an intraday low of RM4.36 to the US dollar, or close to an 18-year low of RM4.40 which was recorded last year.
Another factor that could see EM currencies decline is the unraveling of carry trades across the region. The strategy, whereby investors borrow money in a country with low rates to buy higher-yielding currencies elsewhere, tends to be profitable in a stable policy environment.
However, given the bleak outlook of a benign US policy backdrop following Trump’s win, the drastic monetary and policy changes that might occur across the world means that investors may sell off EM currencies in large quantities to exit the carry trades, HSBC cautions.
Analysts believe that the ringgit is headed for further downside before it gets better.
In a note on Friday, AmResearch expects the ringgit to trade at a range of RM4.25 to RM4.28 against the greenback while not ruling out further downside risks due to external factors.
“The ringgit continues to be under pressure due to foreign selling of local equities amounting to RM116.7mil on Thursday as well as the decline in crude oil prices with Brent now trading at US$45.7 per barrel. In addition, the yuan fell near a six-year low against the dollar,” it says.
It is worth noting that US policies – and by extension, Trump’s – are a key determinant in both crude oil prices as well as the yuan’s direction.
In past statements, the president-elect has reiterated his desire to undo the nuclear deal with Iran which saw sanctions lifted on the country – a move which could block Iran’s new crude oil supply entering global markets.
At the same time, he has labelled China as a “currency manipulator”, although it is in the best interest of both countries to keep trade ties strong.
As crude oil prices tend to move in lockstep with the ringgit, the prospect of higher supply going forward looms large over the currency.
Members of the Organisation of Petroleum Exporting Countries (Opec) will convene later this month in Vienna, Austria, to discuss the previous agreement to cut output. In September, Opec members had agreed to cut production at a range of 32.5 million to 33 million barrels per day in a bid to support prices.
“The outcome of the Vienna meeting inevitably has a bearing on the direction of the ringgit going forward. The current decline in crude oil prices amid the build-up in inventories has put pressure on the currency,” says MIDF Research in a note.
However, there is a silver lining for investors looking for returns in a falling ringgit environment. For example, shares of exporters tend to outperform the broader market in this situation due to better earnings prospects thanks to a higher dollar.
Crude palm oil (CPO) is another beneficiary of a weaker ringgit as importing countries will be more keen to secure the commodity at present prices.
On Friday, CPO futures prices for January delivery rose above RM3,000 for the first time in nearly four years. Should prices stay at current levels for the next few months, the earnings of major public listed plantation firms are set to improve considerably, making them an attractive investment proposition.
At the same time, gold continues to be a favoured investment instrument during uncertain times as a hedge against inflation as well as its safe haven status. However, the renewed strengthening in the dollar may cap the commodity’s upside potential for the time being.