Ringgit safe from Peso contagion

Stable government and robust macroeconomic fundamentals are expected to protect the ringgit from regional currency depreciation, as experienced by the Philippines peso that fell to an 11-year low last week.

OANDA Corp head of trading for Asia Pacific, Stephen Innes, said the peso is being weighed down by both geopolitical and internal instability.

“Most of the bluster is on the back of emerging markets in Asia feeling the weight from investors trimming positions on riskier assets due to the escalation of tension between the US and North Korea.

“The peso is the ‘local whipping boy’ as the currency has fallen massively out of favour with international investors due to heightened political instability, stemming from terrorist kidnappings and President Rodrigo Duterte’s war on drugs,” Innes told The Malaysian Reserve.

The Philippines’ currency fell to its lowest since Aug 29, 2006, last Friday and continued to weaken yesterday, dropping 0.03% to 51.021 against the US dollar at 2.40pm.

According to Bloomberg data, the peso lost 2.5% this year and is the worst performer among the 12 currencies tracked.

The depreciation is attributed to geopolitical concerns, while the country heads for its first current account deficit in 15 years.

“On the macro level, markets fear that the Philippines’ current account deficit could balloon in coming years on the back of a Duterte-led infrastructure boom — without political stability, foreign investors will not provide the investment,” Innes said.

However, Innes said investors remain positive on Malaysia, as the country is politically and economically stable.

“The Philippines is a unique situation. Malaysia, on the other hand, has a robust macro- economic outlook and a very stable government.

“Investors continue viewing the Malaysian market favourably and I would not expect any spill over effect from the Philippines,” he said.

The ringgit performed slightly better against the greenback yesterday, standing at RM4.2950 after the market closed.

Asian currencies are also set to be boosted by the lack of regional geopolitical escalation over the weekend and subdued US consumer price index (CPI) growth.

“Last Friday’s US CPI unsurprisingly came in on the tepid side, sitting at 1.7 % year-on- year and shifting the December rate hike probability lower, while disappointing the dollar bulls,” Innes said.

“On the North Korean front, the market’s response continues to be rather a low key — with no escalation of rhetoric over the weekend, we should expect the moderate risk reduction from last week to abate.”

He cautioned that geopolitical jitters could return with joint military exercises between South Korea and the US slated for Aug 21 this year.

“Given the dovish Federal Reserve (Fed) narrative, the local basket remains constructive over the medium term, but short-term wobbles related to global equity markets will continue to be a concern over the near future.

“But with the North Korea panic seemingly pausing and the ‘lower for longer’ Fed, we could see some tactical buying and pockets of interest across the region despite the omni-present headline risk,” Innes added.

The Malaysian Reserve

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.

Stephen Innes

Stephen Innes

Head of Trading APAC at OANDA
Stephen has over 25 years of experience in the financial markets and currently based in Singapore as the Head of Trading Asia Pacific with OANDA. Stephen's market views focus on the movement of G-10 and ASEAN Currencies. His views appear in Bloomberg, CNBC.Reuters, New York Times WSJ and the Economist. His media appearances include Bloomberg TV & Radio, BBC International, Sky TV, Channel News Asia, ASTRO AWANI and BFM Malaysia. Stephen has an extensive trading experience in Spot and Forward FX, Currency and Interest Rate Futures, Money Market Derivatives and Precious Metals. Before joining OANDA, he worked with organisations like Nat West, Chemical Bank, Garvin Guy Butler, and Sumitomo Mitsui Banking Corporation. Stephen was born in Glasgow, Scotland, and holds a Degree in Economics from the University of Western Ontario.
Stephen Innes