THE ringgit rally took a breather yesterday after slipping, and stayed at RM4 against the greenback following a newsbreak that China’s central bank would suspend its counter-cyclical factor which dissuaded investors from Asian foreign-exchange (forex) markets.
After appreciating to a 19-month high on Monday to close at RM3.9980 to the US dollar, the Malaysian currency weakened to RM4.0052 at 5pm yesterday.
The turn of event was attributed to a Bloomberg report on Monday, which stated that the People’s Bank of China (PBoC) had called for lenders in the country to suspend their use of the counter-cyclical factor in its currency fixing mechanism.
Oanda Corp head of trading for Asia Pacific Stephen Innes said the yuan complex is a considerable momentum driver for the entire Asian market and that a correction could dampen short-term regional sentiment.
“Investors are cautious across all emerging forex markets in Asia and tactically scaling back risk for a few reasons, including the weaker yuan fix which will have a significant influence on regional inflow, and the recent US dollar mini-revival which triggered profit-taking on short dollar positions globally,” Innes said.
He added that a few Asian central banks have expressed their displeasure with a stronger currency, while speculative views are getting a bit one-sided as a lot of investors jumped back on the regional bandwagon in late-2017 and early-2018 which is triggering some minor overbought signals.
According to the Bloomberg report, PBoC’s decision to suspend the counter-cyclical factor effectively removes a component used by banks to calculate their submissions to the currency’s daily reference rate.
It said this signals China’s confidence in the yuan’s current trajectory which has been steadily appreciating against the US dollar since the end of 2016.
The counter-cyclical factor was introduced last year to manage currency volatility in the country.
“The suspension does not change the longer term yuan narrative. It only removes a measure that was designed by degrees to limit the need to intervene when the yuan was weakening.
“However, the long yuan was a well-subscribed trade this year and the combination of stronger US dollar, weaker yuan fixes and the counter- cyclical surprise suggests the rampant US dollar-to-yuan downtrend is temporarily snapped — causing an aggressive wave of profittaking,” Innes said.
Meanwhile, he said the ringgit looks “structurally” poised to rally on surging energy prices, with the floor for oil prices remaining firm as markets continue to reiterate core bull drivers.
“The market stirred and popped higher when the US Energy Information Administration bumped its global oil demand forecast for 2018.
“The American Petroleum Institute also reported an eye-watering draw of 11.19 million barrels, which sent both West Texas Intermediate and Brent oil prices rocketing to three-year highs,” Innes added.
This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.