Sunday, February 13, 2011

Volume 3 Issue 7: Two-Cent Economics

Simple Charting for Currency Trading

In this issue of the Main Streeter, we shall attempt charting in the most simplest form with very limited tools to see the trends of a few relevant currencies for the near future. Bear in mind that the charting technique used here is NOT for forex trading purposes and you should consult your investment advisor before you deal in any kind of forex. The reason we are looking at this is to try to gauge where the Ringgit is going in the near term and to see what are its implications on our economy as well as on our own money in our pockets.

First up, the USDMYR. Chart 1 shows how much USD1.00 is worth in terms of RM. This is the typical convention for foreign currency exchanges. Very few people would quote you how much USD is RM1 worth.

Chart 1: USDMYR

As you can see in Chart 1, the USDMYR has been on a downward trend since its peak in the beginning of 2009 and has breached below the RM3.1345 support at the end of 2010. Bear in mind that the Ringgit is appreciating as the chart moves downwards because 1 USD can buy less RM. This means that the Ringgit is achieving record highs (in fact, 13-year high).

The natural question to ask is, will this trend continue? Firstly, after several lower lows, the downward trend looks like a strong one. Moreover, as mentioned, the RM3.1345 support has been breached. It is possible that the downward movement should go on for a bit, but we expect it would rebound off the downward trendline. If the rebound from the trendline climbs back up above the support-turned resistance at RM3.1345, it should stick around there for a while. But if it doesn't, we can continue to expect more appreciation of the Ringgit.

Like we mentioned earlier, knowing the trend is not meant for forex trading purposes. If the RM continues to strengthen, it would probably make Malaysia's exports more expensive, further reducing Malaysia's already thin balance of trade surplus. With wages no longer low, it would be a challenging environment in the next few months for Malaysia's export-oriented industries if the RM continues to appreciate.

On the other hand (Oh god, a two-handed economist!), if the USDMYR rebounds above the RM3.1345-level, it would probably mean that exports would remain relatively stable for the time being. Nonetheless, the recent appreciation is likely to be due to the expected increase in the Overnight Policy Rate by Bank Negara in their Monetary Policy Committee meeting in March. Any erratic movement is unlikely before the 4Q 2010 GDP report that is due to be out on 18 February 2011.

Chart 2 shows how much USD is 1 AUD worth. This is also the convention. It may or may not shock you, but currently, 1 AUD is worth more than 1 USD, and this level has never been seen before 2010. One of the main reasons for this is because of China's recovery from the US-led financial crisis in 2008/2009. What does China have to do with Australia? Well, currently, China is Australia's largest export destination simply because of Australia's vast amounts of natural resources. Hence, China's economic boom will pull Australia along. And right now, the US economy is only beginning to reappear from the woods.

Chart 2: AUDUSD

Now, it appears that the resistance-turned-support should hold the AUDUSD level above USD0.9797 for the time being  But observe that in period A, the AUDUSD looked set to be on an upward trend but ended up plunging all the way down to pretty much record lows. This patterns is pretty similar to that in period B that we are currently facing. Is it about to plunge hard again? This appears unlikely because even if it breaks the USD0.9797 support and the moving average, there is still an additional support from the upward trendline indicated by period C.

However, patterns could self-fulfilling. They will appear in whatever places that we want them to appear. As an example, as mentioned, there was a huge plunge after period A and we could start worrying if there will be another plunge after period B simply from the fact that the pattern strongly resembles that of period A. We can also imagine the support shown from the upward trend in period C.

Taking the cross rates of the above currencies, we would then obtain the AUDMYR rate, and is shown in Chart 3 as the price of 1 AUD in RM by convention.

Chart 3: AUDMYR
Chart 3 may appear to show how strong a psychological barrier can hold a chart pattern. Take a look at the RM3.1519 resistance. It has held up against a rally three times and looks set to be tested for the fourth time soon. Remember that if the priceline goes upwards, it means that the Ringgit is depreciating. If it breaks above the resistance this time around it could quite possibly form an ascending triangle breakout above the RM3.30-level. But if it rebounds off the resistance at RM3.1519, it might correct all the way down to the upward trendline and find support there. 

Nonetheless, we expect it to continue staying in the triangle for the time being because of offsetting expectations of interest rate hikes by both the central banks of Australia and Malaysia. But if something plays out away from expectations, then we can expect the unexpected and a breakout should happen. 

Finally, we must repeat that the above analysis is not meant to induce any form of currency trading, but merely for entertainment and hopefully educational purposes. It is important to think about how believable the above analyses are. It is appealing because it is simple. We almost want to believe that there could be a higher power at play here, particularly when we see how the AUDMYR keeps failing to breach the RM3.1519 resistance.

That said, I will never be an advocate of charting and technical analysis. Perhaps, I could even be rooting for my analysis to be wrong just so that I can tell myself to stick to value investing. 

P/S: The feeble attempt at technical analysis should not be taken too seriously because of the lack of volume data. I merely ripped the currencies off the St. Louis Federal Reserve Database. They may not be true representations of day-to-day currency movements, but useful enough to look at currency trends. 

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