FX Research – Relief Rally for Ringgit Malaysia

v Oil prices are recovering after hitting lowest in mid-January 2015 to trade above 50- and 100-day moving averages on sharp decline in drill rigs and slowing production. Hedge funds turn most bullish in eight months and if history to repeat, we see good possibility at an average 30% rebound in the next 12 months from the trough.

v Given the strong relations between Ringgit Malaysia (RM) and oil prices, we argue that this is a relief rally from signs of oil prices stabilizing and likely to keep the currency consolidating between 3.580-3.700 against the US dollar.

v A plethora of economic difficulties that originated from sliding oil prices is likely to ease. We believe Ringgit Malaysia has yet to fully priced-in for the short-term stabilization of oil prices and there is still an opportunity for the currency to enjoy some tactical pullback for now.

v Key drivers – (i) narrowing credit default swap (CDS) of Malaysia against its peers, (ii) rising positive real interest rate at 3.15% as at February 2015 and (iii) unjustifiable gap between RM and regional peers on total return basis.