heavy fire....selling pressure...

Buy Reverse Knock-Out as Slowdown Hurts Ringgit, Barclays Says
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By David Yong
Jan. 15 (Bloomberg) -- Malaysia’s ringgit will weaken as falling commodity prices erode the trade surplus and the central bank cuts interest rates to revive economic growth, according to Barclays Capital Plc.
To profit from the decline, the U.K. investment bank recommended a one-month ringgit put option against the dollar with a so-called reverse knock-out price, according to a research report issued yesterday. This type of derivative is a cheaper alternative to a regular option because the knock-out barrier limits the maximum return.
“The drivers of Malaysia’s balance of payments dynamics are turning against the ringgit,” Goh Puay Yeong, a currency strategist at the bank, which is the third-biggest trader of foreign exchange, wrote in the report. “With oil prices falling, Malaysia’s export buffer from energy-related commodities is also rapidly thinning.”
Investors should buy so-called reverse knock-out ringgit put options due in a month, which grant the right to sell the currency against the dollar as long as its losses don’t exceed 3.66, Goh said in an interview in Singapore. The option ceases to exist, or gets “knocked out,” should the ringgit reach, or weaken beyond that level.
The investor can exercise the option by buying the dollar at the one-month forward rate of 3.5901 and selling the U.S. currency at the same time in the spot market at just below 3.66, Goh said.
Slumping Exports
The currency has dropped 3.9 percent this month, the second- biggest loss in Asia after the South Korean won, as Malaysian exports contracted and factory output slumped by the most since 2004. The ringgit fell to 3.5953 today, the lowest level since Dec. 11, and traded at 3.5910 as of 12:19 p.m. in Kuala Lumpur.
Malaysia’s trade surplus sagged to 10.6 billion ringgit ($2.95 billion) in October and November, versus an average of 13.9 billion ringgit during the third quarter, Barclays said. Foreign-exchange reserves fell to $91.4 billion on Dec. 31 from $97.7 billion on Nov. 28, the lowest level since April 2007, the central said last week.
Crude oil traded at $36.81 a barrel compared with a record high of $147.27 reached on July 11. An average price of $60 a barrel in 2009 will trim Malaysia’s current-account surplus by half to 7.9 percent of gross domestic product, Barclays forecasts.
Prices of palm oil, Malaysia’s biggest commodity export, have dropped 58 percent since touching an all-time high of 4,298 ringgit per ton in March last year.
Bank Negara Malaysia will lower its overnight interest rate to 2 percent from 3.25 percent by year-end, Barclays predicts, which would be the lowest level since the benchmark was introduced in 2004. The first cut will likely be a quarter- percentage point on Jan. 21 when policy makers kick off meetings fro 2009, it said.
To contact the reporter on this story: David Yong in Singapore at dyong@bloomberg.net Last Updated: January 14, 2009 23:37 EST