Last Friday, barely 24 hours after Donald Trump was elected as the next U.S. President, both the Singapore Dollar (SGD) and the Malaysia Ringgit (MYR) depreciated significantly against the US Dollar (USD).
|8 Nov (before elections)||1.39||4.21|
|11 Nov (after elections)||1.41||4.40|
Wait…What’s Happening? Isn’t It Supposed To Be The Other Way Around?
The popular sentiment was that the USD would be in trouble after Trump was elected President. It was assumed to be similar to Brexit earlier this year, when the UK Pound depreciated against most major currencies following the unexpected result of the Brexit vote.
In actual fact however, Trump’s victory in the election didn’t mean that the USD would decline.
Rather, what it actually threaten, and did indeed do, was increase the level of volatility across financial markets and Foreign Exchange (Forex) markets.
In our first published article after Trump’s win, 8 Things Singapore Investors Need To Know Right Now, one of the key points we raised was that Singaporeans should “watch the USD closely”.
That has proven to be the case as shortly after, the USD started appreciating against many Asian currencies including both the SGD and MYR.
Why The USD Appreciated?
The expectations for now are that Trump’s policies could lead to additional infrastructure projects within the U.S. economy and increase domestic investments.
These projects can lead to two things for the U.S. market. Firstly, it increases the demand for the USD, as projects would need to be funded mainly by USD. Secondly, it may also increase inflation in the U.S. economy.
With all things remaining equal, both of these may lead to higher interest rate, further increasing the demand for the USD.
Also, the protectionism approach that Donald Trump takes may lead to an increase in business operations among U.S. corporations within the country itself, further increasing capital inflow.
Do note however that these are expectations that people have based on what they think Donald Trump would do. Nobody knows exactly what Donald Trump will end up doing, and we suspect, not even Donald Trump himself.
Why Asian Currencies Depreciated?
While there are some reasons for people to be optimistic about the USD, even if they don’t necessarily agree with Donald Trump’s approach, the same cannot be said for most other markets in Asia, particularly emerging markets.
Hillary Clinton as President would have been the safer option for many Asian countries, since she previously served as Secretary Of State for Foreign Policy under the Barack Obama administration from 2009 to 2013.
Donald Trump on the other hand represents much uncertainty in the foreign policy space. His campaign approach focused a lot on how he wants to make America great again, at the (possible) expense of many foreign trade policies that he felt have not benefitted US citizens.
If you take what Donald Trump has said about foreign policies (e.g. “It’s not free trade with China; it’s stupid trade”) literally, then there are reasons to be worried for Asian countries that rely heavily on U.S. trades.
And even if Donald Trump does not end up doing what he says he wants to, there is still no reason to feel optimistic. The way we see, it’s status quo at best, and a decline in trade and possible capital outflow for Asian economy should things indeed decline.
MYR Depreciating Against SGD Has Nothing To Do With Singapore Or Malaysia, But Everything To Do With The U.S.
Emerging markets are more likely to be affected by global slowdown compared to developed countries. That is one of the reasons why the MYR have depreciated more against the USD, compared to the SGD.
And because currencies are always interrelated, the MYR also depreciates against the SGD, even as the SGD itself depreciates by a smaller amount against the USD.
On 9 November, the exchange rate for the SGD/MYR was between 3.03 to 3.04, a rate we are used to seeing. However on 10 to 11 November, the exchange rate started climbing till it reach a stunning level of 3.19, that is, S$1 = RM3.19. It has seen declined back to lower levels of 3.07 (at the point of writing), but we suspect this is an area that we should keep a lookout on.
The U.S May Still Be Okay, But Not The Rest Of Asia
The U.S. is a much bigger market. So while we may think that Donald Trump’s policies will not help its people in the long run, it’s likely that they can still adequately support themselves and even show growth. On the other hand, many other Asian countries are heavily reliant on U.S. trade for growth.
Donald Trump may not be right, but he may not be wrong either.
And because Forex is a zero-sum game, an appreciation for one country’s currency would mean a depreciation for another.