• Several emerging currencies suffered renewed selling the past week

• Malaysian ringgit has stayed relatively resilient, down 3.6% since June

• US-China trade tensions continued pressuring emerging currencies

• Amidst backdrop of weak currencies affecting economic growth ahead, markets to see volatility

Emerging market pain likely to persist

Emerging currencies were subject to renewed selling pressures, particularly the past few days. Turkish lira was down to 6.65 to the USD (versus 6.01 a week ago), while Argentina peso is at 37 against the greenback (it was 31 a week ago). Meanwhile the Indonesian rupiah is at a 20-year low and appears headed for 15,000 rupiah mark to the USD.

As for the ringgit, the USDMYR cross is up to 4.13 – the highest USD level since mid Oct/Nov 2017. This was the period when crude oil price was on a tear, with Brent oil ripping past USD60 per barrel and ended 2017 at near the USD70 per barrel mark.

Despite crude oil price for most of 2018 staying well above the USD70 level, the ringgit has weakened and appears to decline further in the short-term. Indeed, movements in currencies are also subjected to supply demand dynamics, which are also influenced by fundamentals and change in sentiment. From fundamentals perspective Malaysia's current account as at 2Q18 is still in surplus position at above 3% of GDP, whilst Thailand is in a much better position. This partly explains why both the ringgit and baht have performed rather well this year versus USD, as opposed to the damaging declines in several emerging currencies, i.e Indonesia, Turkey and Argentina.

The worry of contagion effect will dictate sentiment in the short term, we believe. Depending on the outcome of the US-China tensions, we might see pressures continue building until the of the year, as growth in GDP slows. However, as we presented last month in our report – better fundamentals, i.e. current account surplus is still providing support for the ringgit, and so too are Malaysia's inflation levels, which provide better flexibility for monetary policy adjustments if required.

Source: BIMB Securities Research - 4 Sept 2018