Malaysian Ringgit Offshore-Onshore Spread Signal
NDF foretelling Ringgit respite? Equity market regains some upside
KLCI: 1,603.36 points 2015 Year-end Target: 1,650 points
…which spiked up to almost 1,000 pips near mid-August… Henceforth, the underlying pressure returned more strongly. In the ensuing months of June to August 2015, the spread of USD/MYR offshore-onshore forward rates expanded progressively and eventually spiked up to almost 1,000 pips near mid-August. During that time span, the spot USD/MYR breached two important psychological levels, namely 3.80 in early July and 4.00 near mid-August.
USD/MYR 12-month forward offshore-onshore spread (from end-August 2014 to present):
…is now showing clear sign of tapering. Towards the end of August however, the underlying Ringgit situation was turning for the better. This was attested by the rapid reversal in the offshore-onshore spread as it turned negative in late August and again lately. It is notable that the spread slumped to more than -200 pips at its recent trough, the lowest level since March this year. We believe the prevailing downswing is related to, among others, the changing market perceptions over the timing and pace of US Fed’s future monetary actions.
The forward market may be anticipating spot Ringgit recovery in the near-term… The collapsing offshore-onshore spread may portend to at least a transitory reversal in the spot USD/MYR trend. On this score, we may see the Ringgit strengthening against US Dollar towards between 4.20 and 4.00 levels within the next few months.
…which would, likewise, be positive to the equity market. The impact of strengthening Ringgit on the equity market would most likely be positive
BM KLCI (from end-August 2014 to present)
Reiterate year-end 2015 FBM KLCI baseline target of 1,650 points. We reiterate our year-end 2015 FBM KLCI baseline target of 1,650 points (with upper and lower range of 1,700 and 1,600 points respectively) which equates to PER16 of 14.6x and -0.4SD (standard deviation)