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Thursday, March 17, 2016

USD-MYR: Struggling To Hold Onto Its Uptrend Line

 USD had a very volatile trading session yesterday. According to FXSTEET, the USD came under selling pressure "after Fed “Dot Chart” revealed the policymakers now expect only 2 rates hikes by the year end as opposed to expectation of four rate hikes in December. Furthermore, the Fed also revised 2016 GDP forecasts lower". USD index dropped sharply to 95.93 (see Chart 1 below).


Chart 1: USD Index's daily chart as at Mar 16, 2016 (Source: Stockchart.com)

As a result, USD-MYR broke below 4.10 overnight. Again we are facing the prospect of a continuing decline in USD-MYR or plain English, strengthening of MYR.


Chart 2: USD-MYR's daily chart as at Mar 17, 2016_8.45am (Source: Investing.com)  
 
I have appended below the charts of USD Index next to USD-MYR. We can see the following:
  • USD-MYR tracked USD Index closely up to May 2015
  • From May 2015 to September 2015, MYR weakened while USD was moving sideways; resulted in a rising USD-MYR
  • In October-November 2015, USD-MYR failed to make a new high despite sharp rise in USD Index
  • From then on, USD-MYR again tracks USD Index fairly closely
From this simple analysis, I believe that MYR made a bottom in late September to early October. At that point of time, the USD-MYR was trading at 4.45-4.50.


Chart 3: USD Index & USD-MYR's daily chart as at Mar 17, 2016 (Source: Stockchart.com & Investing.com)  

In conclusion, I believe that we should underweight stocks that had benefited from a weaker MYR (or stronger USD-MYR) such as exporters. Instead we should overweight stocks that would benefit from a stronger MYR (or a weaker USD-MYR).

3 comments:

KL Tan said...

Morning Mr Alex,
How does one profit from a strengthening ringgit?

How far will ringgit go? What's your personal opinion? 3.70?

Alex Lu said...

Hi KL Tan

By itself, the strengthening ringgit will benefit importers directly. Thus you can expect auto stocks and certain consumer stocks (such as Amway) to recover as the companies concerned will likely to report better earnings. Airline stocks may enjoy higher ticket sales and, if the fuel price increased less, may see better earning too.

The improvement in MYR may less to improved consumer sentiment. When consumers start to spend, all kind of industries will see benefit turnover and earnings. Property stocks are already beginning to recover as expectation of a recovery is quickly fed through the economy.

When you look at a stock that had fallen, you ask: WHY? Then you should attempt to see whether the company will benefit directly from stronger MYR. Next you consider the indirect benefit of improved MYR, in term of more consumer spending. I am sure you will find a handful of stocks that had fallen sufficiently to invest in. Good luck!

KL Tan said...

Thank you for your insights!