As the main supplier of US dollars, Bank Negara may run short of US dollars. To increase the supply, Bank Negara has issued a new ruling requiring exporters to convert 75% of their new export proceeds to the ringgit. Previously, exporters can keep their proceed in US dollar if they take the view that the ringgit will depreciate against the dollar.
To incentivize the exporters, Bank Negara has announced a fairly attractive deposit rate as well as allowing these exporters to go into active and free hedging for their foreign currency requirements of up to six months. Are these moves enough to reduce the volatility of the ringgit – thus leading to its eventual recovery. In my opinion, these moves have a high chance of success. Here's why!
The price of any security, commodity or currency is a function of supply and demand. If the demand of USD (to repatriate investment fund or to pay for import) increases vis-a-via MYR, the equilibrium will only to reach if the price of USD increases in term of MYR. This is aggravated by a contraction in the supply of USD as investment fund stops coming to Malaysia as well as our exporters stop converting their USD to MYR. By forcing the exporters to convert their USD proceed to MYR, we have an increased supply of USD.
The other reason is technical consideration. Firstly, USD-MYR is now facing strong resistance from the horizontal line at 4.45-4.50. This is the September 2015 high which capped the rise of USD-MYR in January 2016 and may do the same again today.
Chart 1: USD-MYR's weekly chart as at Dec 6, 2016_11.45am (Source: Investing.com)
In fact, if you look at the daily chart, MACD has just crossed below the MACD signal line. This is a bearish signal that alerts us of a possible trend reversal.
Chart 2: USD-MYR's daily chart as at Dec 6, 2016_11.45am (Source: Investing.com)
Secondly, USD index which appeared to be breaking to the upside of its trading range of 92.5-100.25, seems to be faltering. Yesterday, USD index dropped back into the range. This would lead to weakness in USD index for the weeks ahead unless it can quickly recover back above the 100.25 level.
Chart 3: USD index's weekly chart as at Dec 5, 2016 (Source: Stockchart.com)
Based on tentative weakness in USD index, USD-MYR and measures taken by Bank Negara, I believe that the ringgit could recover in the next few weeks and the eventual recovery of the ringgit would lead to the recovery of our stock market.