Lim Meng Hoong Analyzes the Malaysian FX Risk Structure

Amid intensifying regional asset volatility and fluctuating external conditions, Mr. Lim Meng Hoong poses a key question: as the ringgit strengthens, money supply expands, equity indices fluctuate, and manufacturing remains in contraction, are we witnessing a true recovery structure or a “misaligned growth”? Starting from this question, Mr. Lim reviews recent Malaysian macro data to uncover the underlying drivers and translate them into actionable trading and hedging strategies.

Nominal FX Strength vs. Real Drivers: Distribution Matters More Than Direction

The ringgit has gained about 4% over the past year, with some recent pullback. However, Mr. Lim cautions against simply interpreting this as “capital returning” or the natural end of the dollar cycle. He focuses on the “ingredient list” behind FX moves: interest rate differentials, oil and palm oil prices, FDI flows, regional risk appetite, and dollar volatility. By breaking down these variables, Mr. Lim observes that interest rate differentials have diminished in importance, while trade terms and FDI have gained influence. This means FX is no longer just a rate story, but a product of capital cycles and supply chain migration.

Directional bets are no longer optimal. The framework raised by Mr. Lim emphasizes “managing distribution, not predicting points.” In practice, this means selling USD call options and layering in KO structures to capture volatility premiums, while using spot/NDF/onshore forward basis changes as position adjustment signals: if basis widens and appreciation momentum slows, shift to short-term swap roll-down for “cost reduction + basis reversion” certainty, replacing directional volatility.

M3 Expansion and PMI Contraction: Curve Logic Under Liquidity Churn

The year-on-year rise in M3 money supply alongside sustained sub-50 manufacturing PMI is, for Mr. Lim, the key contradiction of the current cycle. Nominal liquidity is rising, but real economic recovery is slow, meaning funds are stuck in the financial system rather than fueling production. He calls this “liquidity churn.”

This structural mismatch is reflected in the yield curve: short rates are anchored by policy, with limited adjustment room; medium/long rates reflect growth expectations, the inflation impact of the subsidy reform, and local debt supply pace. Mr. Lim focuses on 2s5s and 2s10s slope changes, using repo rates, fiscal supply, and bid-to-cover ratios as “rhythm panels.” When repo rates rise at quarter-end alongside increased fiscal bond supply, curve steepening probability rises—suitable for widening spread positions. If short-term inflation expectations rise but long rates lag, the curve may “twist flatter,” increasing directional short risk and requiring a pivot to 5s10s bands and real yield strategies to control DV01 exposure.

Structural Shifts Beneath Narrow Index Fluctuations: From Breadth Decline to Sector Repricing

Recently, the KLCI has hovered around 1620, neither rising nor falling, but Oriental Daily data shows “mild index, weak breadth,” with a skew in advancing/declining stocks. In the framework of Mr. Lim, this means the market appears stable but is internally defensive. Capital is concentrated in banks, utilities, and food retail (stable cash flow sectors), while growth and export chains lack expansion, indicating risk appetite has not recovered.

In this structure, chasing index rallies is risky; a better approach is beta-neutral sector pair trades. Mr. Lim goes long on policy-supported, externally resilient sectors (semiconductor equipment, upstream materials, midstream processing) and shorts on discretionary consumption, high-beta themes, and valuation-sensitive sectors, calibrating hedge ratios with FX and order data. The essence is to use “external demand cycle and FX” (slow variables) to drive “relative returns” (fast variables).

Global Spillover and Execution System: Turning Macro Views into Controllable Capital Curves

Mr. Lim sees US equity volatility, dollar direction, and global risk premium as “external variables,” transmitted to Malaysian stocks via risk appetite, dollar funding costs, and passive index weights. The key is not to predict US moves, but to make portfolios “absorbable” to external shocks. His three-layer execution framework includes:

Layer 1: FX Risk Management 

Focus on selling volatility strategies. Use KO protection to control extreme scenarios. Strict Vega limits. Use NDF-onshore basis and risk reversals to gauge tail changes.

Layer 2: Yield Curve and Liquidity Management  

Pre-set slope quantiles for position building. Repo rates, fiscal supply, and interbank liquidity as rhythm parameters. Automated steepener/flattener exposure adjustments, avoiding emotional over-leverage.

Layer 3: Sector and Microstructure Hedging  

ETF flows, spot-futures divergence, and intraday breadth to judge passive fund strength. Use box spreads and calendar basis trades to capture low-risk annualized returns when deviations widen. Hedge baskets offset system beta.