When China moves to lower the value of the yuan, others in the developing world follow suit. China’s currency moves also come at a critical time for the yuan: it was recently placed into the IMF’s group of elite global currencies. Chinese officials may not be starting a currency war, some experts argue. After all, they’re allowing market forces to have greater influence over the yuan now. By devaluing its currency, China gains an advantage in global trade. Its exports become cheaper, and more attractive, to foreign buyers. To stay competitive against China, its trade partners — mostly in Asia — devalue as well to maintain a cheaper currency.
Further devaluation may be possible as it is envisaged that China will experience slower growth in line with its historic shift of its economy to a more consumption- and service-driven.
What has happened to the Renminbi (RMB)?
We have seen significant depreciation in the RMB, since early 2014.
What is the outlook for RMB?
Slowing economic fundamentals, coupled with global uncertainties will create downward pressure on RMB to further devaluate.
What will be the impact on Ringgit Malaysia (MYR)?
Since China is a key trading partner to Malaysia, we may see a parallel devaluation in the Malaysian Ringgit in line with China’s move. In validating this point, a simple regression analysis is performed between MYR-USD (dependent) and RMB-USD (independent variable), whereby we saw MYR’s trading pattern is in tandem with the movement of RMB.
Given the current exchange rate of RMB (6.68 against USD @ 25 July 2016), the MYR is currently trading at a fair value of RM4.0828 vs its forecasted value of RM4.0679, with a 95% confidence interval of between RM3.3817 and RM4.7541.
The statistical relationship is summarised as follows:
Assuming RMB continues its devaluation path towards 7.10 (http://www.macrobusiness.com.au/2016/07/how-low-will-the-yuan-go-and-what-harm-will-it-do/), we may see further potential devaluation in the Ringgit Malaysia to MYR4.75 against the USD:
Target forecast MYRUSD = -6.7812 + 7.10 (1.62472) = 4.75
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