U.S. Election Shakes the Ringgit: Octa Broker’s Analysis

It has been a very tough week for the Malaysian ringgit as three major events—the U.S. presidential elections, the Federal Reserve (Fed) meeting, and the Bank Negara Malaysia (BNM) rate decision—were in the spotlight. Arguably, the most significant event was the election of Donald Trump as the next president of the United States. The U.S. dollar rallied across the board, pushing other major currencies down. Asian currencies were no exception, with Malaysian ringgit (MYR) losing some 1.4% in value on 6 November. The U.S. Dollar Index (DXY), which measures the strength of the U.S. dollar against a weighted basket of six major foreign currencies, gained 1.64% on that day. ‘Such a dramatic rise in the greenback’s value is explained by Trump’s official policies, or more precisely by the implied effect these policies are likely to have,’ says Kar Yong Ang, a financial market analyst at Octa Broker. ‘Generally, it all boils down to Trump’s tax, immigration, and trade policies, which differ greatly from what Harris proposed. The market perceives them as inflationary, which is why we saw a bullish impact in the U.S. dollar.’

Indeed, mass deportations of illegal immigrants may put upward pressure on wages, while introducing new tariffs may increase import costs. If, under these circumstances, U.S. nationwide inflation accelerates, the Fed will be forced to pursue a tighter monetary policy and keep the interest rates higher for longer. Although last Thursday, the Fed did cut the rates by 25 basis points (bps), as the market expected, Jerome Powell, the Fed’s chair, stressed that further steps would be more cautious and patient. ‘It remains to be seen whether Trump’s policies will have a long-term inflationary impact, but in any case, they will have no near-term impact on the U.S. monetary policy’, says Kar Yong Ang, a financial market analyst at Octa Broker.

Still, Trump’s trade policies carry a major risk for the Malaysian economy in the long term. Malaysia is an export-oriented economy with close links with both China and the United States. Trump’s proposal to introduce broad-based tariffs of 10–20% on all imports arriving in the country and a 60% tariff on Chinese goods would have a major negative impact on Malaysian economic growth. ‘Malaysia is an open economy and has a lot to lose if the U.S. turns protectionist and starts to engage in another trade war with China’, says Kar Yong Ang, a financial market analyst at Octa Broker. Indeed, World Bank estimates that approximately 40% of Malaysian jobs are linked to export activities. New tariffs will act as an external shock hitting the demand for Malaysian goods, slowing down its economy and potentially leading BNM to cut borrowing costs, which, in turn, may put additional upward pressure on USDMYR in the long term. ‘In the worst-case scenario of an all-out trade war between China and the U.S. and a 20% additional tariff on all Malaysian exports into the U.S., USDMYR can rise above the 4.800 level and may hit a critical 5.000 mark. However, I do not see that scenario happening, at least not in the short term’, says Kar Yong Ang, a financial market analyst at Octa Broker.

As things currently stand, the Malaysian economy is on a sound footing. Although the latest macroeconomic statistics have been somewhat disappointing—notably, the annual growth in industrial output slowed in September to 2.3% (vs 3.7% expected by the market), while exports declined by 0.3% (whereas the market expected to see a growth of 7.6%), the general trend is still relatively positive. Official estimates show that gross domestic product (GDP) likely expanded at a solid 5.3% rate in Q3. Although economic growth has slowed from the 5.9% growth rate recorded in Q2, it is still expanding at an impressive rate. Furthermore, as Kar Yong Ang notes: ‘the growth rate in Q2 was actually a bit of an outlier as it was the fastest rate in 18 months, due to exceptionally robust investment and higher household spending and exports’.