MYR: Post-election weakness will be temporary – Nordea Markets

The unexpected election result is MYR negative in the near term, but once political uncertainties fade away, the MYR will likely strengthen against the USD, supported by expected USD weakness, high oil prices and solid macro conditions, according to Amy Yuan Zhuang, Research Analyst at Nordea Markets.

Key Quotes

“Malaysia’s general election on 9 May turned out to be more eventful than expected. The surprising victory to the four-party opposition alliance effectively ended more than 60 years’ rule of the United Malays National Organisation. Although the election result is seen as a victory for democracy in Malaysia, it has likely negative implications on the MYR in the short term. The new government will likely bring on a number of political as well as economic changes. But the longer-term prospect for the MYR remains bright, underpinned by expected USD weakness, high oil prices and solid macro fundamentals.”

“Historical lessons tell us that MYR usually weakens against the USD after an election. This is likely triggered by high post-election uncertainties.”

“In the near term, two main uncertainties unsettle the market and weigh on the MYR. One uncertainty is about the new government.”

“In addition, economic policy will likely see some changes.”

“In the longer term, as focus on the political change has faded, the same two dominating forces will become important for the MYR again: the USD and oil prices. Both factors will prove to be MYR-supportive. We expect the USD rally has soon run its course and the EUR/USD will start rising in the coming few months. Oil prices are expected to stay above USD 70 per barrel in the coming 12 month as indicated by forward contracts. Moreover, the MYR remains undervalued, which supports continued correction.”

“Finally, macro fundamentals are fairly solid. GDP growth bounced higher in 2017, prompting the central bank to hike rates. Current account is in surplus. Although the fiscal deficit remains large, high oil prices provide some tailwinds to government revenues.”