PETALING JAYA - The ringgit fell to a four-month low against the US dollar following China's move to lower its reference rate for the yuan, bringing the yuan to the lowest level against the US dollar in six years.
Under a trading band mechanism, the People's Bank of China (PBoC) guided the daily reference rate for the yuan to a six-year low yesterday as the country's markets resumed trading after a week-long holiday.
Its daily rate of 6.7008 yuan (S$1.40) against the greenback was a 0.3 per cent depreciation from its last fixing price of 6.6778 on Sept 30.
The ringgit closed lower against the US dollar yesterday, down 1.5 sen to 4.15 (S$1.40) or the lowest since early June.
Markets may be jittery to signs emanating from China, given what had happened to the yuan last year.
On Aug 11, 2015, the Chinese central bank cut its daily reference rate for the yuan by 1.9 per cent, triggering a major selloff across asset classes globally.
Additionally, foreign exchange (forex) markets have become wary of further volatility in light of the "flash crash" in the pound when the British currency fell as much as 6 per cent in a single day last week.
A chief currency strategist for an investment bank said the ringgit, the Philippine peso and the baht were considered the most sensitive to the yuan's movements and could decline further.
"This is an expected continuation of the Chinese government's bid to weaken the yuan in order to boost exports in the face of slower economic growth. As for the ringgit, he expects further weakening in the short term, possibly to RM4.18 versus the US dollar," he said.
On the other hand, while he considers the ringgit to be undervalued, he said the prospect of further devaluation in the yuan, coupled with the expected hike in US interest rates, could put some pressure on the Malaysian currency for the foreseeable future.
In a commentary yesterday, AmBank Research said the ringgit would trade in a tight technical range of RM4.13 to RM4.16 against the US dollar.
Defending the yuan against large fluctuations over the past year as part of the daily reference rate mechanism has taken a toll on China's forex reserves.
On Monday, the PBoC disclosed that its reserves had fallen by US$19 billion (S$26.2 billion) for the month of September. This brought its total currency reserves to US$3.17 trillion, or the lowest since April 2011.
Despite the controls, the central bank had previously indicated its inclination to allow for the yuan's fluctuations to be dictated by market forces.
On Sept 30, the yuan was officially entered into the International Monetary Fund's basket of global reserve currencies, marking a milestone in the Chinese government's efforts to legitimise the yuan as a strong alternative to the US dollar.