Skip to content
  • Group
    • About MARC
    • Leadership
    • Investor Relations
    • Notable Issuances
    • MARC Ratings
    • MARC Solutions
    • MARC Data
    • MARC Learning
    • Careers
  • Services
    • Credit Ratings & Related Assessments
    • Sustainability-Related Assessments
    • Economic & Fixed-Income Analysis
    • Sustainability-Related Advisory
    • Debt Advisory
    • Analytics Consulting Services
    • Subscriptions
    • Data Analytics
    • Credit Reporting
    • Learning Programmes
  • Insights
    • Rating Announcements
    • Research & Analysis
    • Views
    • MARC in the Media
    • Newsfeed
    • Latest@MARC
  • Events & CSR
  • Contact Us
    • Contact Us
    • Service Level Feedback Form
    • Publication Feedback Form
    • Whistleblowing
Menu
  • Group
    • About MARC
    • Leadership
    • Investor Relations
    • Notable Issuances
    • MARC Ratings
    • MARC Solutions
    • MARC Data
    • MARC Learning
    • Careers
  • Services
    • Credit Ratings & Related Assessments
    • Sustainability-Related Assessments
    • Economic & Fixed-Income Analysis
    • Sustainability-Related Advisory
    • Debt Advisory
    • Analytics Consulting Services
    • Subscriptions
    • Data Analytics
    • Credit Reporting
    • Learning Programmes
  • Insights
    • Rating Announcements
    • Research & Analysis
    • Views
    • MARC in the Media
    • Newsfeed
    • Latest@MARC
  • Events & CSR
  • Contact Us
    • Contact Us
    • Service Level Feedback Form
    • Publication Feedback Form
    • Whistleblowing
  • Sign In
  • Subscribe
  • Group

    Group

    The MARC Group of Companies comprises MARC Ratings, MARC Solutions, MARC Data and MARC Learning.

    • About MARC
    • Leadership
    • Investor Relations
    • Notable Issuances
    • About MARC
    • Leadership
    • Investor Relations
    • Notable Issuances
    • MARC Ratings
    • MARC Solutions
    • MARC Data
    • MARC Learning
    • MARC Ratings
    • MARC Solutions
    • MARC Data
    • MARC Learning

    MARC Ratings

    • Rating Guide
    • Rating Process
    • Rating Symbols & Definitions
    • Rating Methodologies
    • Regulatory
    • Lead Managers

    MARC Solutions

    MARC Data

    MARC Learning

    • Careers
    • Careers
  • Services

    Services

    MARC's subsidiaries each provide distinct product offerings and services.

    • Credit Ratings & Related Assessments
    • Sustainability-Related Assessments
    • Economic & Fixed-Income Analysis
    • Credit Ratings & Related Assessments
    • Sustainability-Related Assessments
    • Economic & Fixed-Income Analysis
    • Sustainability-Related Advisory
    • Debt Advisory
    • Analytics Consulting Services
    • Sustainability-Related Advisory
    • Debt Advisory
    • Analytics Consulting Services
    • Subscriptions
    • Data Analytics
    • Credit Reporting
    • Learning Programmes
    • Subscriptions
    • Data Analytics
    • Credit Reporting
    • Learning Programmes
  • Insights

    Insights

    Find the vital information you need and stay up to date with the latest news from MARC.

    • Rating Announcements
    • Research & Analysis
    • Views
    • Rating Announcements
    • Research & Analysis
    • Views
    • MARC in the Media
    • Latest@MARC
    • MARC in the Media
    • Latest@MARC
  • Events & CSR

    Events & CSR

    MARC organises a diverse range of events throughout the year to engage with all stakeholders.

    • MARCares
    • Events
    • MARCares
    • Events
  • Contact Us

    Contact Us

    Let's get the conversation started - Get in touch with us!

    • Contact Us
    • Service Level Feedback Form
    • Publication Feedback Form
    • Whistleblowing
    • Contact Us
    • Service Level Feedback Form
    • Publication Feedback Form
    • Whistleblowing
MARC Online
Subscribe
Menu
  • Group
  • Services
  • Insights
  • Events & CSR
  • Contact Us
Menu
  • Group
  • Services
  • Insights
  • Events & CSR
  • Contact Us
Credit Ratings & Related Assessments
Sustainability- Related Assessments
Economic & Fixed-Income Analysis
Subscriptions
Sustainability- Related Advisory
Debt Advisory
Analytics Consulting Services
Data Analytics
Credit Reporting
Learning Programme
  • Insights
  • Views
  • Anxiety Over Future Path of Greenback and Renminbi
Economic Views

Anxiety Over Future Path of Greenback and Renminbi

8 August 2018

View Report

Contacts

It is hardly surprising that the debate on the future direction of the US dollar and emerging market currencies continues to heat up in the news. The dollar’s strength in recent months has grabbed the attention of many, particularly investors, exporters and economists. Greater optimism about the greenback’s prospects has evidently induced portfolio investors to re-assess their portfolio allocations, especially in emerging market economies.
 
Asian currencies have been on the downtrend in recent months. The Indonesian rupiah has slumped by 6% in the year to date, despite its central bank’s move to raise the benchmark interest rate three times in May and June. After a brief respite following the rate hikes, the rupiah weakened by another 1.5% against the greenback. Similarly, the Indian rupee weakened by almost 7% as at end-June as foreign institutional investors sold off their holdings of equities and debt. Only the Malaysian ringgit remained sturdy, at least for now. Even then, the ringgit is slowly slipping in value against the greenback.
 
Much of the blame – at least from the rhetoric of emerging market policymakers – goes to Uncle Sam, whose policies are now strengthening the greenback. Putting aside factors like a continuing hike in the Fed funds rate (a standard move by the central bank to be ahead of the curve and to prevent the economy from heating up further), current US policies that precipitated a trade spat with China are some of the main factors for the weaker currencies in emerging market economies. The underlying logic for this makes clear sense: China’s economy is critical to global economic growth, accounting for about a third in terms of contribution in recent years. China’s market is also the main destination for Asian exporters. Case in point: China has been Malaysia’s primary export destination for the past few years, accounting for roughly 14% of the latter’s total exports. This is in contrast with a decade ago, when China only imported about 9% of Malaysia’s total shipments. A weak Chinese economy means equivalently lacklustre Asian export-dependent economies.
 
With the increasing intensity of the trade spat between the US and China, economic prospects for the latter are getting more uncertain. Although GDP growth cooled down by only 0.1 percentage point in the recent quarter, China’s weakening macro prospects are beginning to give investors sleepless nights. Those who heavily invest in emerging markets are now more concerned about the possibility of a further depreciation of the renminbi, which could translate into a further drop in the value of emerging market currencies. Such a fear is not baseless, as some Asian currencies tend to follow the path of the renminbi very closely (although one should not imply any causality in their relationships). An example of this would be the ringgit: the ringgit-USD exchange rate tends to track the renminbi-USD movement very closely, with a stunning correlation of 87% in the past five years. This is, of course, much too close for comfort. A further drop in the value of the renminbi will likely be followed by a further depreciation of the ringgit, if history is any guide.
 
But why would anyone think that the renminbi could be weaker in the near term? Some insist that the notion that China is using its currency to protect its export sector is misleading. In fact, according to this argument, the weakness in the renminbi in recent times is mostly due to the strength of the US dollar, and not because of any intentional policy to weaken the currency.
 
Whatever the truth may be, one should note that as far as portfolio investors are concerned, the real reason for the weakness of the renminbi is probably irrelevant. Instead, a more critical question is whether it would continue to depreciate in the near term. And there are reasons to believe so. First, even if one were to believe that the strength of the greenback explains the weakness of the renminbi, statistics reveal that the US dollar index has strengthened by more than 8%, while the renminbi depreciated by only 6%. Hence, the Chinese currency could depreciate further to reach the level implied by the basket of currencies it uses in determining the value of the renminbi.
 
Second, although the Chinese authorities keep pledging not to use the currency to support its export sector, one has to be extra careful in interpreting such a statement. Under normal circumstances, yes – the authorities would probably refrain from using the renminbi as a weapon to enhance its trade competitiveness. But these are hardly “normal circumstances” – the trade spat with the US had never gone this far in recent decades, certainly not during the Reagan or Bush administrations. And China under President Xi Jinping has tremendous pride. As such, the trade jabs between the two countries may not stop in the near term. Under such circumstances, if China comes under tremendous pressure to support its export sector in the face of the tariffs imposed by the US, one cannot rule out the possibility that it could let the renminbi soften further to provide some temporary relief to its exporters.
 
Of course, contrarian investors will argue otherwise in their assessment of the future prospects of emerging market currencies. One argument cites how the US dollar historically weakened during periods of rising US protectionist policies, i.e. prior to the Plaza Accord in 1985 and after the imposition of steel tariffs by President Bush in 2002. Again, these experiences should not induce us to think that such a trend will keep repeating.
 
For one thing, the dollar’s current appreciation coincides with an increasingly strong US economy. The solidifying US job market, as evidenced by rising capacity utilisation and the jobless rate being at its lowest in 18 years, imply that the US Fed would continue to try being ahead of the curve by hiking interest rates to avert future macro imbalances (e.g. surging asset prices and inflation). On top of that, Trump’s fiscal stimulus would hit the economy at a time when it is not needed at all. This will compound the pressure on the Fed to control future inflation.
 
Therefore, if emerging market currencies remain under pressure in the near term, it is not something that is totally unexpected. In fact, a confluence of factors are indeed working against emerging market currencies at this juncture. The good thing is that, such a scenario may not last for too long for the ringgit. Its medium-term prospects remain encouraging, judging by the real-effective exchange rate remaining below one-standard deviation from its long-term mean. More favourable macro prospects that are underpinned by fewer economic imbalances (i.e. lower debt and contingent liabilities) in the medium term will also induce investors to flock back into the country, pushing up the ringgit to its long-term mean.
 
 
This article was first published in The Edge Malaysia Weekly on 06 Aug 2018 – 12 Aug 2018.

Related Report

Read More

Related Issues

Read More

Related News

Read More

You May Also Like To Read

See All
Fixed-Income Views

Foreigners net buyers of ringgit bonds in January

22 February 2023

Fixed-Income Views

Local govvies extended gains in December

9 February 2023

Fixed-Income Views

Local govvies mostly rallied, ringgit ended higher in November

6 January 2023

See All

Let’s get started.

Subscribe to our mailing list today

Subscribe Now
Group
  • About MARC
  • Leadership
  • Investor Relations
  • Notable Issuances
  • Careers
Regulatory
  • Rating Reviews Summary
  • List of Defaults
  • List of Credit Ratings Published
  • List of Entities on Rating Watch
Services
  • Credit Ratings & Related Assessments
  • Sustainability-Related Assessments
  • Economic & Fixed-Income Analysis
  • Sustainability-Related Advisory
  • Corporate & Debt Restructuring Advisory
  • Subscriptions
  • Analytics Consulting Services
  • Data Analytics
  • Credit Reporting
  • Learning & Customised Programmes
Subsidaries
  • MARC Ratings
  • MARC Learning
  • MARC Data
  • MARC Solutions
Insights
  • Rating Announcements
  • Research & Analysis
  • Views
  • Latest@MARC
  • MARC in the Media
Events
  • Corporate Events
  • Corporate Social Responsibility (CSR)
  • Advertise with MARC
Contact Us
  • Contact Us
  • Service Level Feedback Form
  • Publication Feedback Form
  • Whistleblowing
  • Group
    • About MARC
    • Leadership
    • Investor Relations
    • Notable Issuances
    • MARC Ratings
    • MARC Solutions
    • MARC Data
    • MARC Learning
    • Careers
  • Services
    • Credit Ratings & Related Assessments
    • Sustainability-Related Assessments
    • Economic & Fixed-Income Analysis
    • Sustainability-Related Advisory
    • Debt Advisory
    • Analytics Consulting Services
    • Subscriptions
    • Data Analytics
    • Credit Reporting
    • Learning Programmes
  • Insights
    • Rating Announcements
    • Research & Analysis
    • Views
    • MARC in the Media
    • Newsfeed
    • Latest@MARC
  • Events & CSR
  • Contact Us
    • Contact Us
    • Service Level Feedback Form
    • Publication Feedback Form
    • Whistleblowing
Terms & Conditions
Privacy Notice
Copyright Notice
Whistleblowing
PDPA Notice
© 2023 Malaysian Rating Corporation Berhad. All rights reserved.
Facebook Twitter Linkedin

Join MARC Mailing List

I would like to subscribe this mailing list. Please tick whichever is applicable

I agree/ do not agree (please tick whichever is applicable) to receive future events, conferences or marketing materials from MARC. *

Privacy Notice *

Declaration *