The main drivers of MYR will be: (1) trade news between the US-China since the MYR tracks the yuan closely; and (2) BNM maintaining the 3.00% OPR with now a 40% chance of a rate cut in 1Q2020 while still factoring in 2–3 Fed rate cuts which would provide positive interest rate differentials.

Still, risk sentiment will depend on: (1) whether the US removes the September levies; and/or (2) the US plays hard ball and expresses an unwillingness to shift on the levies: risk is off as the “Phase 1” deal is called into question.

In the near term, the MYR could reach 4.10 by end-November driven partly by positive trade news. By end- 2019, the MYR could touch 4.05–4.10 as opposed to our previous outlook of 4.19–4.21 against the USD. We expect the yuan against the USD to be around the 6.97–99 levels. However, should adverse noise emerge especially on trade news, it could see the MYR easing back to the 4.15–4.19 levels and the yuan to hover between 7.03 and 7.06.

• The yuan’s 7.00 level against the USD was our and investors’ focus over the past few months as the psychological level where the PBoC will intervene.

• At the height of the trade war, the yuan surpassed the psychological level to reach a high of 7.1876 against the USD. During this period, the MYR reached a high of 4.2280 against the USD.

• More recently, the yuan returned to the 7.00 psychological level and closed below the 7.00 handle. It is now a sign of reassurance that risk is firmly on and the “Phase 1" trade deal is restoring calm to financial markets. In tandem with this, the MYR has gained to close at 4.13.

• In a longer term, the focus remains on how the yuan will continue to behave — whether it will be on a strengthening mode or otherwise. Our mood is still “cautious”. We remain focused on whether the US will roll back some of the upcoming tariffs to get the “Phase 1” deal signed. There is no guarantee that President Trump will do so.

MYR drivers...

• The MYR is being driven by two things at the moment:

1. Improving US-China trade deal risk tone. The MYR trades closely as a proxy for the Chinese yuan. The yuan has strengthened to below 7.00 against the USD on the trade deal optimism, and this has given the MYR a boost.
2. BNM has maintained the 3.00% OPR in a mostly unchanged statement but in contrast to September’s meeting this time around with BNM more positive on the growth outlook citing: “Government measure will provide additional impetus.” Private sector spending will remain as the engine for growth.

• These two factors will be seen as supportive to the MYR. If the positive risk tone continues, we can expect the MYR to remain positive.

• In the near term, the MYR could reach 4.10 by end-November as long as the trade news is positive. By end-2019, if there is no adverse news, the MYR could touch 4.05–4.10 as opposed to our previous outlook of 4.19–4.21 against the USD. We expect the yuan against the USD to be around the 6.97–99 levels.

• Our projection takes into account of the MYR witnessing some selling pressure during the end of 2019. It is due to the USD demand which is a seasonal year-end booking.

What can still drive risk sentiment?

• Despite optimism on the US-China “Phase 1” trade deal, we maintain caution. It is due to China being seen to be unwilling to flinch on tariffs with the removal of levies a possible sticking point for the deal.

• Risk sentiment will depend on: (1) whether the US removes the September levies; (2) the US plays hard ball and expresses an unwillingness to shift on levies: risk is off as “Phase 1” deal is called into question; and (3) if potential incoming macro data comes in below expectation.

• However, should adverse noise emerge especially on trade news between the US and China, it could see the MYR easing back to the 4.15–4.19 levels as we foresee the yuan to hover between 7.03 and 7.06.

2020 MYR outlook

• Looking into 2020, the MYR outlook appears to be positive. With only a 40% chance of the OPR to be reduced in 1Q2020 and still factoring in 2–3 rate cuts by the Fed in 2020, the interest rate differentials should act positively for the MYR.

• Further, if trade negotiations between the US and the rest of the world improve, that will improve global investors’ sentiment. With the US Presidential election on 3 November 2020 and China’s National People’s Congress in 2023, President Xi would not want to see China weaken. Hence, we can expect some “sweetening” with respect to trade deals.

• Thus, a stronger MYR against the USD in 2020 is in our cards. We are looking at between 4.05and 4.10 partly due to the dollar weakening and the strengthening yuan which could trade between the 6.93–6.95 levels.

Source: AmInvest Research - 7 Nov 2019