1. The preceding post on “Does Malaysia appear to be ripe for an Eminent Speculative Currency Attack” posted on October 27, 2016 (can be accessed here), has listed the prerequisite conditions, the specific economic indicators as well as political situation, for a country to qualify for becoming a victim of possible speculative currency attack.
2. Only those antecedents of speculative currency attack were considered that have gained strong empirical support over the years of experience and research. Among those are such as behavior of international reserves, the real exchange rate, domestic credit, credit to the public sector, domestic inflation election and political instability. We illustrated further how Malaysia in its present state appears to qualify on all the fronts for an eminent speculative currency attack.
3. However, what we did not take into account is the fact that by the time this post was written and published the speculative currency attack might have been under way for some time already. This conclusion naturally suggests itself in the light of the recent events (referring to MYR/USD flight and Bank Negara actions to protect it) and when the technical analysis of the MYR/USD historical price movements presented below is considered. Below we present the analysis of historical monthly price charts for MYR/USD pair.
4. Figure 1 below presents monthly historical price movements of MYR/USD pair. As seen in this chart 40 years high for MYR/USD was 4.8847 which was reached in January 1997 (last speculative currency attack on MYR). The recent high was at 4.7300 which was reached on November 11, 2016 as marked in the Figure 2.
5. The next figure, Figure 3, focuses on last 8 years of MYR/USD monthly historical data. As seen in this chart, during the period from April, 2011 till June, 2013 MYR/USD was ranging in a channel 2.9600 – 3.2000 MYR per USD. The currency broke out of this channel in July 2013. Upon it MYR/USD has reached immediately to the new high of 3.3300 – 3.3400 price level that acted as resistance for some time. Notably, MYR/USD has formed “W” bottom formation just before it moved in a quick fashion to 4.4805 (September 2015 high) level breaking the resistance area of 3.3300 – 3.3400 in November 2014. From November 2014 until September 2015 MYR/USD acceleration was very rapid all the way to the new 10 year high at 4.4805 (being fuelled by the infamous 1MDB news).
6. After the reaching the high of 4.4805 in September 2015 MYR/USD appeared to be consolidating in so called “Flag Formation” that can be clearly seen in Figure 4. This pattern is known in the technical analysis to be an up-trend continuation pattern. Continuation of the upward trend is confirmed once the price breaks out of the flag. This is exactly what happened one year later in September 2016. Within three months MYR/USD rallied all the way to the new high of 4.7300 MYR per USD which is slightly short of the ALL-TIME HIGH of 4.8847!
7. Usually, price breakout from the flag formation signifies that the next price movement wave shall be as long as the previous “flag pole”. This is in the most drastic scenario when the trend is really strong. One of the indications that MYR/USD upward trend is strong is the fact that price retracement from 4.4805 level hardly reached even 50% of the “flag pole” (Figure 5).
8. The above chart analysis suggests that speculative currency attack on MYR very well might have been under way for some time now starting from the year 2015 with the first wave of the strong upward move. The second bunch of speculative traders might have joined the band wagon just recently starting from September, 2016 when “flag” pattern was broken upward.
9. However, few considerations are required before concluding. First of all, the above analysis is only one possible way of interpreting recent years of MYR/USD price movements. Secondly, we should not forget that in the above charts we looked at monthly price formations. Therefore, to see confirmation or refutation of any prognosis will require months or maybe even years. The fact cannot be denied however, that MYR/USD is weak and seems to be poised for even further appreciation and in order to correct this situation Malaysia does not have those months or years. The corrective action is required immediately.
10. Technical analysis of the price movements should never be considered without considering fundamentals. Technically MYR is in a weak position right now. It would be incorrect to say that “speculative activity in the offshore market has driven the currency far off from its fundamentals” (Star Biz, 14, November, 2016). We must acknowledge the fact that MYR/USD is extremely weak exactly because of its fundamentals as it was fundamentals of the Malaysian economic and political landscape that has attracted speculators in the first place.
11. Weak Malaysian fundamentals made speculators believe that attack will succeed. MYR is weak and if it will not be strengthened by some fundamental shifts and events in the Malaysian landscape (not by currency protectionist interventions alone but by some real credible changes) the above ringgit bearish scenario might become self-fulfilling. Bank Negara Malaysia must be creative in tackling this problem as only by buying MYR through reserves and requiring Banks in Malaysia to go easy on off shore MYR transactions will not do it.
12. The speculative vultures are waiting and circling, for the opportune time for the next move.