nexttrade: MYR: How Low Can You Go?!

The headline in the Edge reads "Ringgit slides to new 17-year low of 4.3405". I am sure this is not the first time that many of us have seen this. From Chart 1 below, we can see that the USD-MYR broke above the line, AB connecting the recent peaks for the past 10 years at the 3.55-mark in January 2015. USD-MYR then tested the 3.70-mark before pulling back to rest at the AB line. In late June, USD-MYR charged through the 3.70-mark. This represents a bullish breakout of a Cup-with-handle formation. This bullish rally cut through the resistance posed by the 2006 high of 3.80 with little difficulty. It marches on towards its first target of this upside move is 4.45.

Chart 1: USD-MYR's monthly chart as at Sept 7, 2015 (Source: XE.com)

Over the weekend, I met a former colleague who shared an interesting anecdote about how his friend, who owns a manufacturing business, is being pressured ~~pressurized~~ by his Nepalese workers for higher pay because they are effectively taking a pay cut due to the depreciation of our Ringgit. If you look at Chart 2, you can see that our MYR has depreciated against the NPR by 20% since August last year. If this manufacturer pays additional allowance to his workers, his profit will be eroded. He would be so lucky if the additional expenses can be offset against increased proceed due to export sales. What if his products are meant for the domestic market? He would have no choice but to raise his selling price. Thus, the weakness in the MYR will lead to inflation.

Chart 2: MYR-NPR's monthly chart as at Sept 7, 2015 (Source: XE.com)

The weakness of MYR applies across the board- the worst cases are against the Philippines Peso (PHP) & Cambodian Riel (KHR). This sharp decline is due to fear & uncertainty brought on by the political unrest. The momentum of the fall will take a life of its own, which does not reflect the underlying fundamental of the economy. In this difficult times, we have to make the best of this situation. One of the things that you should avoid is to buy foreign currencies for speculative purpose. I won't be surprised if the MYR would snap back, even without a resolution to our political mess. I can see foreign funds eyeing Malaysian stocks for the simple reasons that if everything returns to normal, they will make capital gain plus an easy 20% forex gain.