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Thursday, February 01, 2018

USD-MYR: Near-term Target 3.80

It is now quite well-accepted that our MYR is on a strengthening mode. There are a few reasons to explain the strengthening of our MYR, ranging from crude oil recovery to interest rate hike. The main reason is the steady growth of our economy at 5.5-5.6%.

The best way to figure out where USD-MYR is going is to look at the chart. Chart 1 below shows very clearly that USD-MYR broke below its uptrend line at 4.25 in September 2017. It went to a low of 4.17 and attempted to climb back to its uptrend line in November. It went as high as 4.24- missing the rising uptrend line at 4.33.


Chart 1: USD-MYR weekly chart from July 2013 to January 2018 (Source: Investing.com) 

If you looked back at USD-MYR movement from 2008 to 2013, you would see the opposite, where USD-MYR broke above its downtrend line at 3.00 in September 2011. Here we are given a lesson in technical analysis which I would enumerate here:
1. The upside breakout of a downtrend line marks the end of the current downtrend.
2. The end of a downtrend means a significant bottom has been achieved; thus it is relatively safe to buy.
3. The end of a downtrend could lead to two possible scenarios- a sideways movement or an uptrend

The upside breakout of USD-MYR was followed by a sideways movement that lasted 23 months from September 2011 to July 2013.


Chart 2: USD-MYR weekly chart from July 2008 to June 2014 (Source: Investing.com) 

I am sharing this observation because there are some investors who feel that USD-MYR will continue to drop after the breakdown of the uptrend line as noted above. I believe that it is not a very likely scenario because Malaysian exporters would be badly affected if our MYR were to strengthen too rapidly. Thus I believe BNM will intervene in the forex market to slowdown the strengthening of our MYR, especially if the level of USD1 to MYR3.80 is threatened. That's the level that our MYR was pegged to the USD during the period of capital control from 1999 to 2005.

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