Thursday, September 23, 2010

USD-RM cross rate may hold the key to the direction of FBM-KLCI

Like many Asian currencies, our Ringgit has strengthened substantially since March 2009 (see Chart 1 below). This is reflected in the cross rate of USD-RM which dropped from 3.70 to 3.10. A host of Malaysian exporters are suffering the effect of a stronger Ringgit. Their cry for help can be heard in the corridor of power & soon our central bank would have little choice but to step into the forex market to sell Ringgit in order to reverse the trend. The first Asian central bank to act in this fashion is the BOJ & I expect other central banks would not be far behind.


Chart 1: USD-RM exchange rate as at September 22, 2010 (Source: Yahoo Finance)

I have mentioned before that our stock market is correlated to the strength of our Ringgit. To put it differently, our FBM-KLCI is inversely correlated to the USD-RM cross rate. From Chart 2 below, we can see the following:

1) the bullish reversal in the USD-RM in March 2008 coincided with the top of the 2007 bull market for equity; and
2) the bearish reversal in the USD-RM in March 2009 coincided with the bottom of the 2008-9 bear market for equity.

It's interesting to note that the 2007 bull market in Bursa ended with a V-shape reversal. Our stock market has a sharp run-up over the past 2 months. Are we about to see another V-shape reversal? Has the die been cast? Watch the forex market closely!



Chart 2: FBM-KLCI & USD-RM exchange rate for the past 5 years (Source: Tradesignum & Yahoo Finance)
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4 comments:

  1. Ai LingThursday, September 23, 2010 12:29:00 PM

    Hi Alex,

    If i assume sharp correction will occur at KLCI. I should sale cyclic stock, then technology, then banking and then defensive stock. In general sense, i suppose GLC company is lower urgency.

    Appreciate your opinion and I am sorry for the messy question.

    AL

    ReplyDelete
  2. Patrick LimFriday, September 24, 2010 2:47:00 PM

    Hi Alex,

    Thank you so much for always sharing your useful and valuable views and opinions for us, you really are a GENEROUS and a GREAT analyst of our time!

    Patrick Lim

    ReplyDelete
  3. Alex LuMonday, September 27, 2010 7:53:00 AM

    Hi Ai Ling,

    If we were to enter into a bear market, you should reduce our exposure to the more volatile stocks, such as cyclical stocks and stocks which have gone up a lot. Over the years, I notice that market tends to revert to the mean. The more you've gained, the more you'll give back.

    GLC companies have general tracked the market in this cycle, with a few notable exceptions (such as Tenaga). They would also follow the rule of reversion to mean.

    ReplyDelete
  4. Alex LuMonday, September 27, 2010 7:54:00 AM

    Hi Patrick Lim,

    Thanks for the nice compliment.

    ReplyDelete