In its economic viewpoint on the ringgit’s movement against the Chinese yuan, the research team at Kenanga Investment Bank Bhd (Kenanga Research) pointed out that there is an apparent influence of China’s yuan on the fluctuation of ringgit.
In recent years, it said, the yuan and the ringgit exhibit an increasingly tight co-movement, reflecting the inclusion of the yuan into the IMF’s Special Drawing Rights basket in 2016 and strong economic ties between China and Malaysia.
It noted that the co-movement was engendered through the channels of international trade and currency management. As such, deciphering these factors is integral in predicting future movement of the ringgit in different economic episodes.
It highlighted that the ringgit was dragged by weaker yuan during the US-China trade war and the recent Coronavirus Disease 2019 (Covid-19) due to elevated risks and uncertainty. Inversely, the ringgit has also strengthened in tandem with the value of yuan after the announcement of the phase-one of the US-China trade deal middle of 2019.
It also noted that that in the wake of the US-China trade war, China demonstrates its strength by allowing the yuan to weaken pass its psychological threshold of 7.0 prompting the policymakers to allow the ringgit to depreciate against dollar.
The yuan also continued to serve as a barometer for ringgit’s movements during the emergence of the Covid-19. The rapidly spreading coronavirus, which is now officially a pandemic, offset the positive outlook on the US-China trade deal, affecting global economic growth.
Among the ASEAN Currencies, the ringgit and the Singaporean Dollar are more sensitive to the Chinese yuan’s swings, given their trade, tourism and financial links.
“With the expectation that the above-mentioned factors would accelerate in the near term, we foresee the Chinese yuan and the ringgit to exhibit strengthened co-movement, unless the country gradually enhance its financial liberalisation by changing its de-facto currency regime towards a free-float,” it opined.
“We view that a free-float regime could unleash the ringgit’s underlying strength, attracting more foreign funds into the capital market,” it added.
On its forecast, Kenanga Research said; “Status quo, since the China’s massive belt and road initiative was launched in October 2013, a one per cent decrease in the Chinese yuan against the US dollar results in an average decrease of 1.76 per cent in the ringgit against dollar.
“Based on this estimation, we forecast yuan to depreciate against the greenback by 0.57 per cent to 7.03 per dollar (average in March 2020), thus prompting ringgit to depreciate by one per cent to 4.26 per dollar (average March 2020).”