BOE’s Super Thursday, Ringgit flattened in offshore markets
The story defining the painful depreciation of the British Sterling in recent weeks has been rapidly fading expectations over the Bank of England raising UK interest rates.
Only a month ago, the markets were predicting a more than 90% probability of a UK interest rate increase this month. By Thursday, this probability had evaporated to less than 15%. A crippling combination of negative economic data, disappointing growth figures and another reversal in tone from BoE Governor Mark Carney has been the driver behind these minimal expectations of a UK interest rate rise.
With it already being a foregone conclusion that UK interest rates were to be left unchanged as expected, attention was directed towards the language of the policy statement and whether there was a split in the MPC vote.
Sterling still appears oversold and could be thrown a lifeline, if the BoE delivers a “hawkish hold” that leaves the door open for future rate hikes. Expectations over the central bank possibly taking action in August are likely to heighten, if more than two MPC members vote, or at least signal a desire for higher UK interest rates.
What would be seen as a major threat to the Sterling resuming its horrific downward spiral is if the BoE issues a downbeat policy statement, suggesting a downgrade in UK economic growth, and a potential change in inflation forecasts limits the need to raise UK interest rates. This would likely spell more pain for the Pound.
Taking a look at the technical picture, the GPUSD is firmly bearish on the daily charts. Previous support around 1.3750 could transform into a dynamic resistance that encourages a decline towards 1.3500 and 1.3440, respectively.
Malaysian bonds tumbled while the Ringgit received punishment, after the opposition claimed a shocking victory in the nation’s general election. Mahathir Mohamad, who will become the world’s oldest elected leader at 92 years old, pulled off an unexpected victory on Wednesday, overthrowing Prime Minister Najib Razak’s ruling coalition, Barisan Nasional.
International investors are certainly going to be surprised at the election outcome, especially considering that it was not priced in that Najib’s ruling coalition would see such a stunning defeat.
There is likely to be a period of heightened uncertainty in Malaysia following the surprising election results. The Ringgit is going to be at threat to domestic political uncertainty, and the onshore market could find itself vulnerable to downside losses when the market reopens as expected at the beginning of next week.
It will also be interesting to monitor how both international investors and ratings agencies react to the developments in Malaysia. The new leader has promised to abolish a controversial GST tax in Malaysia, and although this would improve sentiment domestically as a result of no more GST being added to items, it does present a risk to reduced government revenues.
It is shaping up to be a miserable trading week for emerging market currencies, which have fallen victim to an appreciating Dollar and heightened geopolitical risk. With the Dollar poised to appreciate further amid US rate hike expectations and uncertainty denting appetite for risk, most EM currencies could be exposed to further downside risks.