By Dr. Margarita Peredaryenko and Sofea Azahar are part of the research team at EMIR Research.
Technical analysis of the historical moves of US$/MYR pair in various time frames reveals few possibilities.
First, we notice that during most of Pakatan Harapan (PH) time, the US$/MYR pair has been moving within a price channel, finding its support (a price level keeping it from coming down further) at 4.05 level and resistance (a price level keeping it from soaring higher) at 4.20 level. Refer to the figure below, which presents the weekly chart for the US$/MYR pair.
This channel was broken upwards on the news of government change on March 1, 2020. The US$/MYR then quickly soared to the previous strong historical resistance level at 4.45. To see this, refer to yet another figure below that presents the weekly chart for the US$/MYR pair where we can notice that for the last four years, the US$/MYR pair has been moving within a bigger channel—between 3.89 and 4.45 price levels.
After stopping just short of the 4.45 level on March 23, the price then consolidated around that level during the Movement Control Order (MCO 1.0) period. With the lifting of MCO restrictions, the price has started to gradually come down in a narrow channel (refer to the first figure again), indicating strengthening MYR against US$. MYR has continued to appreciate on a longer timeframe despite the MCO 2.0 and the state of emergency declaration.
Thus, by the end of 2020, the entire negative move for MYR from 4.05 to 4.45, which we observed during the first few months of 2020, is negated completely, bringing Ringgit Malaysia back to its’ pre-Covid-19 level (refer to the first figure above).
The US$/MYR pair is currently consolidating around the 4.05 technical level—the strong technical support level formed during the PH time. However, from a smaller time frame charts, it appears that US$/MYR has broken this level downwards, turning it into potentially a new technical resistance level. Thus, it opens a possibility for further appreciation of Ringgit to about 3.89—the next strong historical support level.
Other Forex analysts, who base their forecasts on global macro models, have similar very modest forecasts for US$/MYR appreciation. Generally, the US$/MYR pair is expected to trade around 4.05 level by the end of this quarter, and this trend is likely to continue until the end-2021.
According to analysts, some of the factors that will help strengthen MYR is the continued weakness of the US$ and President Joe Biden’s proposed stimulus package worth US$1.9 trillion. This stimulus could help boost sentiment towards emerging market currencies through improved demand for goods outside of the US, including those from Malaysia.
The other factor that has been said to influence the movement of Ringgit is the stability of global crude oil prices, given that Malaysian economy relies quite heavily on commodities for exports (LNG, crude oil and CPO). Beginning late last year, it can be observed based on price trends that crude oil prices have started to go up, particularly Brent crude. On February 8, Brent crude oil price reached the US$60/barrel-level and continued rising above the mark since then.
According to an investment banking company, JP Morgan, upside risks to crude oil prices are expected this year due to improving global demand as a result of the more optimistic global economic outlook.
Its global market strategist Kerry Craig also highlighted the key factors to maintain high oil prices – the pickup in oil demand but still curtailed by international travel bans as we are not yet out of the woods, and the supply oil cuts pursued by OPEC+ members.
Yet another crucial factor to strengthen Ringgit would be the pace of economic recovery with the help from the potential saviour from the unprecedented outbreak – National Covid-19 Immunisation Programme. No doubt, the arrival of the vaccine had its impact on positive sentiment. However, according to Malaysia officials, this work is already projected to take at least the rest of 2021 until we shall start seeing some positive returns to it.
On the other hand, there is a need to pay attention to several key factors which could lead to downward pressure on the Ringgit or, in other words, depreciation of the Ringgit.
One of them is the interest rate differentials between the policy rate set by the US Federal Reserve and Bank Negara Malaysia’s Overnight Policy Rate (OPR). Currently, interest rates in the US are not expected to go up whilst OPR remains higher, inducing capital inflows into Malaysia.
However, there remains downside risks to the Ringgit, according to some analysts, as they are expecting the first OPR cut for this year by 25 basis points in the upcoming Monetary Policy Committee (MPC) meeting. Should the interest rate cut take place, interest rate differentials would become smaller, thus, putting downward pressure on the Ringgit.
This rate reduction is on the basis that economic uncertainty remains given the extension of MCO 2.0 and the economic recovery pace depending on the smoothness of vaccination journey as well as the sufficiency of government stimulus packages for the rakyat and businesses.
Another downside risk for the Ringgit is the rise in foreign direct investment (FDI) outflows. However, the Malaysia Investment Development Authority (MIDA) stated that investors’ confidence towards Malaysia remain stable with investment approvals worth RM109.8 billion registered in the first nine months of 2020 whereby FDIs accounted for rather modest 40 per cent (RM42.6 billion) of the total investments approved.
Finally, although indirect, global oil prices would affect Malaysia as low oil prices will put pressure on the country’s government coffers. As stated above, as an economy that relies on commodities, decreased oil prices would be one factor leading to the depreciation of Ringgit.
In summary, we can see that there is near equal number of forces pulling Ringgit in either direction. Given these fundamentals, we would probably indeed see a choppy US$/MYR ranging between 3.89 to 4.20 as the historical levels of technical analysis indicate.
After all, nothing fundamentally has changed yet for Malaysia. As we could see clearly from the chart, the recent Ringgit appreciation has negated in early 2020 as US$/MYR surged on the back of Covid-19 outbreak and country’s political instability. A firmer long-term Ringgit appreciation could only be seen should there be some fundamental changes to the structure of the country’s balance of payments as well as internal stability (Covid- and political-related).