Ringitt Signals Bearish on Weak Economic Clues

Ringitt Signals Bearish on Weak Economic Clues
April 4, 2016

As crude oil recovered from approximately $26 per barrel to $40 per barrel in the past two months, several commodity based currencies got strengthened as well.

The Malaysian Ringitt is one such currency, whose exchange rate is very much dependent on the price of the crude oil. The crude oil contributes to 30% of the Malaysian government’s revenue. The USDMYR currency pair declined from a high of 4.4100 in the third week of January, to a low of 3.8680 on the last day of March, 2016. However, given the number of issues faced by the Malaysian economy, the analysts believe that the strengthening of the Malaysian Ringitt against the Greenback will not last for long.

For a decrease of $1 in the price of crude oil, it is estimated that Malaysia would lose about MYR300 million (based on the crude oil exports). Thus, the current price of about $40 per barrel severely hurt the Malaysia economy.

According to the Malaysian Institute of Economic Research (MIER), the GDP of Malaysia is expected to grow at 4.7% in 2016. The GDP estimate for 2015 was 4.9%. In the fourth-quarter of fiscal 2015, the consumer confidence hit a new low of 63.8. A year earlier, the consumer sentiment index reading was 83.

Recently, Zeti Akhtar Aziz, the governor of the Central bank, increased the 2016 inflation estimate between 2.5% and 3.5%. The previous inflation estimate was 2% to 3%.

The Malaysian government had earlier estimated a budget deficit of 3.2% of GDP, based on the crude oil price of $48 per barrel. However, with the prevailing price of about $38 per barrel, the deficit is expected to widen. In 2015, the overseas funds were net sellers in Malaysia. An estimated $7 billion worth stocks and bonds were diluted in the market last year.

Malaysia stands fifth in the list of countries with illicit capital outflows estimated at MYR1.3 trillion. In January 11, 2016, the Moody’s investor service revised the Malaysian sovereign rating outlook to stable, from the prior rating of positive. A rise in the interest rate in the US would further accelerate the capital outflows and weaken the Ringitt. Thus, fundamentally, the USDMYR pair is expected to rise in the days ahead.

Technically, the currency pair faces stiff resistance at 4.2350. There is also a minor resistance at 4.0959 levels. Major support exists at 3.7290. The currency pair has also formed a bullish white swan harmonic pattern on the charts.

A currency trader could take a long position in the USDMYR pair near the major support level of 3.7290. A stop loss order can be placed 200 pips below the entry price. The long position can be diluted near 4.0500 levels. The trader offers a wonderful risk to reward ratio of more than 1:10.

USDMYR Technical Analysis - 4th April 2016

Binary traders could look into the possibility of purchasing a one touch call option with an expiry in the last week of April. The ideal target level is 3.9000 for the one touch call option contract.



Sammy is our forex expert, with over 20 years experience in the financial sector, she will be keeping you up to date with the ups and downs of currencies around the world

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