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This is a follow up post on the currency USDMYR whereby we anticipate the continuation weakening of ringgit. This week the forecast came to fruition as ringgit dropped 2.27% to close at 4.3920.

Ringgit continues to look vulnerable short term as it is just inching nearer to the previous 1 year low at 4.4812 which is just 2% away. Once it breaks that important level, panic will unfold and all hell will break loose. We maintained our target at 4.71 which is slightly below the historical low during 1997-1998 Asia financial crisis at 4.8850.

Budget Adjustment

Najib recently just announced that he will table several adjustments to the 2016 Budget soon. This was expected as we had pointed out in the previous post that the plunging of crude oil price will prompt government to revise their budget otherwise the budget deficit will deteriorate. Given the slowing down of Malaysia GDP growth quarter to quarter (Q1 5.6%, Q2 4.9% and Q3 4.7%), the impact on the economy remain to be seen. We expect them to implement further subsidy rationalization and cutting on government expenditure.  This will not bode well to the private consumption hence the GDP growth forecast and ringgit for 2016 will be under pressured.

Yuan Devaluation

China central bank moves to devalue the yuan had send the shock wave across the global markets. It seems like they are guiding the yuan lower to be as competitive as other emerging countries but also intervening to avoid it from free fall . Indonesia Thailand currencies fallen 9% and 10% over the past year.  Vietnam and Taiwan declines 4% and 6% last year while yuan down 6% from a year ago. Any further devaluation on yuan will send the ringgit lower in the near term.

So, unless ringgit take out the 4.30 support conclusively in the near term, else we will be seeing 4.70 against USD at the money changer soon.