USD-MYR: Déjà Vu, Again (Amended)

BNM’s clamp-down on offshore ringgit trading – by ceasing the trading the ringgit in the Non-Deliverable Forward (‘NDF’) markets – is viewed as a form of capital controls by the broader market views.

BNM required foreign banks to sign letters of commitment to cease trading the ringgit in the NDF markets. One banker was quoted as saying that banks “cannot repatriate our money and our investments stay in Malaysia if we don't sign (the letters of commitment). For more, go here.

Trading in the NDF markets is like trading of call warrants or put warrants on the Bursa; where on expiry date, the option is cash-settled. As physical delivery is waived, the MYR value is deemed better reflected in the off-shore NDF markets.

Will MYR weakness subside with this restriction in place? Only time will tell. From the chart, we can see that USD-MYR is now trading in the same pattern we saw in August 2015. Back then, USD-MYR broke above the holding level of 3.80, with MACD crossing above the MACD signal line and ADX breaching the preceding high. It then rallied to a high of 4.48 (or a gain of 18%). Now we saw the same breakout in the holding level of 4.25 last week, accompanied by a positive crossover in MACD (meaning uptrend) and a breakout of recent high in ADX (meaning uptrend momentum). My guess is that BNM is trying to cap USD-MYR at 4.50 by clamping down on the off-shore trading of MYR. If this failed, then MYR may potentially rally to 5.00 in the next 3 months' time.

Be careful!!    

Chart: USD-MYR's daily chart as at Nov 18, 2016_9.45am (Source: Investing.com)