FOMC Quantitative Easing and Currency Intervention

The US Dollar finished sharply lower against all major forex counterparts on a week of mediocre economic data and a noteworthy shift in rhetoric from the US Federal Reserve. Dollar Ends the Week at Seven-Month Lows.

The highly-anticipated Federal Open Market Committee (FOMC) interest rate announcement and statement forced sharp moves across financial markets on Tuesday.

Officials strongly suggested that they stood ready to restart Quantitative Easing (QE) measures if the need presented itself, and an especially dovish tone on inflation implied that such a move could come sooner than later. Given that the US Dollar fell precipitously on the first wave of QE, the prospect of QE Part 2 could spark continued USD weakness against major counterparts.

USD/MYR pair fell sharply on Wednesday to a support level at 3.089 and breached that level by the end of the day.

Currency intervention by Asian Central Banks (including Bank Negara and Bank of Japan) on Thursday and during Friday’s Asian session managed to contain the US Dollar fall but uninspiring US economic data dragged US dollar down. USD/MYR went lower to 3.082 on the week closing.

FTSE Group, a global index provider, on Friday upgraded Malaysia to “advanced emerging market” status and Morgan Stanley on Sept. 20 raised its assessment of the nation’s stocks to “overweight.”

According to Barclays Capital Plc, FTSE upgrade is one of the key catalysts for further appreciation of the ringgit. Barclay also noted that the upgrade may attract as much as US$3 billion of new funds to Malaysian assets.

Technically, USD/MYR pair is still on the bearish path with support at 3.072. Resistance is seen at 3.098 and the next higher resistance level at 3.118.

Ringgit, US Dollar and risk appetite

The US Dollar Index make a critical bearish break early this week. The bearish dollar did not follow the risk appetite track as falling dollar was trail by bullish stock market. Has the dollar broken free of its overbearing (negative) correlation to investor optimism?

Dollar's selloff on Monday was due to speculation that Fed will announce another massive quantitative easing program by the end of the year. According to the decision of the August meeting, Fed will use funds from maturing agency bonds and mortgage-backed securities to buy about $27 bln of Treasuries and TIPS. There will be nine operations from September 15 through October 6. That's already known. What triggers the acceleration in dollar's selloff today is speculation, as started by a report from Goldman Sachs, that there will be a total of $1T in bond purchase to be announced later this year, possibly in increments in a few meetings, starting November or December.

On the local front, the government may reassess a 12-year ban on offshore ringgit trading, as cited on Sept. 11, by a CNBC interview with Prime Minister Najib .

The Ringgit appreciate on Monday(13^th) and Tuesday on bearish US dollar and the possibility of the government will relax controls on trading the Ringgit offshore.

By mid- week the US dollar moved sideway and Ringgit registered a correction.

US Dollar index's decisive break of 81.88 indicate a completion of a head and shoulder pattern which suggests that rebound form 80.08 is already finished. In this aspect, we'll be looking at the prospect of deeper medium term decline to 75 level upon breaking of 80.

On the Ringgit, I am looking for the immediate support at previous low of 3.0981 with the next support at 3.089. Resistance is at 3.112.

US Dollar Index

USD/MYR