SINGAPORE (Feb 5): As FX traders look ahead to Malaysia’s upcoming general election, they might want to look back at past polls for trading cues. In four out of the last five polls going back to 1986, the ringgit has strengthened in the six-month periods leading up to the vote (omitting years when it was pegged to the U.S. dollar).

How might the Malaysian currency trade heading into the general election this year, due by August? If the past is a guide, keep an eye on oil. The price of oil was also rising in the run-up to the polls -- suggesting the ringgit may have been reflecting that strength. Oil constitutes a declining, yet still significant, share of Malaysia’s exports and government revenues. So it’s reasonable to expect the ringgit to appreciate when oil is rising.

Trading in Oil, Ringgit -- Six Months Before Elections

Aside from higher oil prices at the moment, the ringgit has other factors in its favor heading into this year’s general
election:

* The previous multi-year sell-off in the ringgit increases its upside potential.

* Capital inflows are supported by Bank Negara Malaysia’s January rate hike and the prospect of more tightening to come.

* Exports more broadly are supported by sustained momentum in global demand.

Oil Up, Ringgit Up, Same Government Most Times

Malaysia’s economy is less dependent on oil than it has been in the past and the ringgit is more independent. Indeed, the ringgit languished in 2016 -- when oil prices rallied 200%. Even so, it might not hurt the incumbent’s chances this year if oil continues to climb a bit longer.