Ringgit to strengthen on forecasted 4.2% YoY GDP growth

The stellar non-farm employment change, better than expected core retails sales, a decline in the unemployment claims, higher than expected flash manufacturing PMI, and Brexit related uncertainty enabled the US dollar to have an exceptional bullish run against most of the currencies including the Malaysian Ringgit.

From a low of 3.9217, the USD/MYR pair hit a high of 4.09. However, there are some critical reasons to believe that the USD/MYR pair would resume its downtrend soon. On a month-over- month basis, the consumer confidence index reading almost remained flat in July with a reading of 97.3.

The data announced yesterday clearly indicated that the US market is recovering, but certainly not to the level that demands a rate hike with immediate effect. In fact, most of the market participants now believe that the Fed will not be able to raise rates before September. Another important point which supports the argument is the wage inflation, which grew only 0.1% in June against the market’s expectation of at least 0.2%. Similarly, the national unemployment rate increased 0.2% m-o- m to 4.9% in June. The lackluster wage increase and the rise in the unemployment rate is definitely a cause of worry and the Fed will certainly avoid a rate hike under such a situation. Thus, we can expect the US dollar to again weaken soon.

The Star Online

In the case of Malaysia, the unemployment rate declined to 3.4% in May, down 0.1% on m-o- m basis. As per Julia Goh, the analyst at the United Overseas Bank (Malaysia) Bhd, the 3% cut in the Employee Provident Fund contribution rate and the 1% cut in the corporate income tax would bolster the GDP growth by about 1%. Malaysia is anticipated to expand at a rate of 4.2% in 2016. The analyst was also positive about the Malaysian Ringgit, considering the consolidation in the crude oil price, unchanged fiscal deficit target, and current account surplus. Thus, fundamentally, we can expect the USD/MYR pair to remain in a down trend until the Fed confirms a rate hike.

The USD/MYR pair is perfectly moving within the descending channel shown in the chart. The MACD indicator is also reflecting bearishness in the currency pair. The pair faces stiff resistance at 4.14 levels. Thus, we can anticipate the currency pair to decline to the next support level of 3.7819.

So, a forex trader should speculate a decline in the USD/MYR pair by taking a short position at 4.05 levels. The stop loss for the recommended trade is 4.15 or higher. The short position should be closed when the USD/MYR pair slides to about 3.85.

A binary trader can benefit from the forecasted decline by purchasing a one touch put option contract from a suitable broker of choice. The target level for the trade should be ideally above 3.85. The cause of the trader will be further strengthened, if the contract expiry date falls in the final week of August.