How low will Ringgit drop?

In the past two years, we have seen significant correlation between ICE Brent Crude oil price and MYR, providing a high degree of predictability for MYR based on movement in ICE Brent Crude oil price

Statistical Inspection

The available daily prices of MYR/USD and ICE Brent Crude oil are extracted from 1 Jan 2014 till 2 Feb 2016 and a simple regression analysis is performed:

MYR vs Brent ICE.png

The statistical outcome is as follows:

A linear trend model is computed for Myr/Usd given ICE Brent Crude. The model may be significant at p <= 0.05.

Model formula: ( ICE Brent Crude + intercept )
Number of modeled observations: 534
Number of filtered observations: 0
Model degrees of freedom: 2
Residual degrees of freedom (DF): 532
SSE (sum squared error): 0.0855409
MSE (mean squared error): 0.0001608
R-Squared: 0.81583
Standard error: 0.0126803
p-value (significance): < 0.0001

Individual trend lines:

Panes Line Coefficients
Row Column p-value DF Term Value StdErr t-value p-value
Myr/Usd ICE Brent Crude < 0.0001 532 ICE Brent Crude

0.0009849

2.029e-05 48.5452 < 0.0001
intercept 0.206827 0.0015934 129.802 < 0.0001

Given the statistical significance of the regression analysis (R-squared of 0.81583 and p-value of <0.0001), we could derive a simple formula to predict the movement of Ringgit based on the movement of ICE Brent Crude Oil:

MYR/USD = 0.0009849 x ICE Brent Crude Oil Price (USD/bbl) + 0.206827

What is the forecast range of Brent Crude Oil?

Scenario 1: USD40-60

http://www.bloomberg.com/news/articles/2016-02-08/world-s-largest-energy-trader-sees-a-decade-of-low-oil-prices

Vitol CEO says crude to stay between $40 and $60 for 10 years

Scenario 2: USD25-40

Forecast Actual Q1/16 Q2/16 Q3/16 Q4/16 2020 Unit
Commodity 30.34 29.8 28.2 26.6 25.1 37.6 USD/BBL

Scenario 3: USD1o or USD20

http://www.moneycontrol.com/news/commodity/when-will-crude-oil-hitbottom_5064741.html

What is the forecast of Ringgit?

Based on the forecast range of Brent Crude Oil of between USD10/bbl and USD60/bbl, we may see the Ringgit possibly trading between RM3.76 and RM4.62:

MYR vs Brent sensitivity

Key Implications

This is a simple desktop analysis. Foreign exchange movements are subject to numerous macro factors. Nevertheless, given the significance of the statistical relationship, this allows us to forecast a broad predictable range for the Ringgit.

 

DISCLAIMER: THIS SITE IS FOR INFORMATION AND ILLUSTRATIVE PURPOSES ONLY AND DOES NOT PURPORT TO SHOW ACTUAL RESULTS. IT IS NOT, AND SHOULD NOT BE REGARDED AS INVESTMENT ADVICE OR AS A RECOMMENDATION REGARDING ANY PARTICULAR SECURITY OR COURSE OF ACTION.  SOURCES USED IN THIS SITE HAVE NOT BEEN INDEPENDENTLY VERIFIED FOR ACCURACY. YOU SHOULD SEEK INDEPENDENT AND PROFESSIONAL INVESTMENT ADVICE IN REGARD TO YOUR INVESTMENT DECISIONS.

Author: Ken Utau

Markets Observer + Food Lover

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