The MYR started the year on a strong note but has recently breached the psychological level of 4.00 against the USD, a level last seen at the end of 2017. The weakness is due to: (1) the stronger USD on the back of the Fed embarking on more aggressive rate hikes in 2018; (2) rising concerns over emerging market debt crisis; and (3) trade war issues, particularly between the US and China where Asia will be impacted more severely compared to the trade war between the US and other regions. The impact from domestic noises was softer.

Underpinned by external noises such as: (1) trade war; (2) the US and ECB policy rate directions; (3) emerging market noises; (4) the US mid-term presidential election; and (5) geopolitical tensions, we expect the MYR to remain in range-bound against the USD. Domestic noises are more likely to inflict a lesser impact on the MYR. We see the USD/MYR trading around 3.98 – 4.02 in 2Q2018 and gradually settle at around 3.90 – 3.93 by the end of 2018. Our assessment continues to show that the MYR is still undervalued based on REER as well as our trend analysis. Our fair value for MYR remains at the 3.80 – 82 levels.

A. Negative external noises weighed on MYR against the USD

• The MYR started the year on a strong note but has recently breached the psychological level of 4.00 against the USD, a level last seen at the end of 2017. The weakness is due to: (1) the stronger USD on the back of the Fed embarking on more aggressive rate hikes in 2018; (2) rising concerns over emerging market debt crisis; and (3) trade war issues, particularly between the US and China where Asia will be impacted more severely compared to the trade war between the US and other regions. The impact from domestic noises was softer.

• In view of the ongoing negative noises largely driven by external factors, we found our local equity market is experiencing a net outflow amounting to RM6.1bil year to date (YTD). Foreign shareholdings in MGS fell to 41.9% at end-May from 45.7% in Jan 2018.

B. Long-term outlook on USD/MYR & DXY

• Our long-term analysis suggests that the USD/MYR is on its strengthening cycle from 2017 and should stay so until 2024. Apart from the support coming from the domestic fundamentals, the MYR will also benefit from the weakening cycle of the USD which should last until 2024. This probably explains why the MYR is still performing better than regional currencies against the USD as reflected in Chart 1.

• But in the near term, underpinned by external noises such as: (1) trade war; (2) the US and ECB policy rate directions; (3) emerging market noises; (4) the US mid-term presidential election; and (5) geopolitical tensions, we expect the MYR to remain in range-bound against the USD. Domestic noises are more likely to inflict a lesser impact on the MYR

• Hence, we see the USD/MYR trading around 3.98 – 4.02 in 2Q2018 and gradually settle at around 3.90 – 3.93 by the end of 2018. Our assessment continues to show that the MYR is still undervalued based on REER as well as our trend analysis. Our fair value for the MYR remains at the 3.80 – 82 levels.

Source: AmInvest Research - 26 Jun 2018