A Quick & Simple View On AUD

AUD/USD has been sliding consistently from the year’s highs and that broad downtrend remains very much in play. Relative interest-rate prognoses are doing much of the damage. The US Federal Reserve is expected to raise its own rates again this month and, should it do so, it will be a significant moment not just for the US Dollar but for the Aussie too.

https://www.dailyfx.com/forex/fundamental/forecast/weekly/aud/2017/12/02/Australian-Dollar-Downtrend-May-Pause-But-Wont-Reverse.html

What may be potential ‘fair value’ for the AUD/USD?

US yield is certainly closing up the gap with the AUS yield, as shown below in the following comparison (using 10Y government bond yield of US and Australia):

US10Y vs AUS10Y.png

As the yield differential is declining, we are seeing corresponding decline in the AUD:

YieldDiff vs AUDUSD.png

As shown below, the regression analysis shows that there is significant statistical relationship between the AUD/USD and the yield differential. At current yield differential of 0.1485%, the forecasted AUD/USD ($0.7368) is relatively higher than the actual AUD/USD ($0.7605), thereby signifying potential future weakness associated with the AUD given the fact the US rate hikes are imminent.

Regression Results.png

The 95%-confidence interval for the forecast AUD/USD is between $0.6041 and $0.8694.

Actual vs Forecast  AUD.png

 

DISCLAIMER: THIS IS A PERSONAL BLOG AND SHALL NOT BE RELIED IN WHATSOEVER MANNER BY ANYONE. ALL ARTICLES CONTAINED IN THIS SITE ARE STRICTLY 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, COMPLETENESS AND TIMELINESS. YOU SHOULD SEEK INDEPENDENT AND PROFESSIONAL INVESTMENT ADVICE IN REGARD TO YOUR INVESTMENT DECISIONS. THE AUTHOR MAY HOLD POSITIONS IN THE SECURITIES MENTIONED IN THE ARTICLES.

Ringgit fairly valued?

KUALA LUMPUR: The ringgit is ”far from reflecting its fair value,” Bank Negara governor said, signalling a desire for the exchange rate to build on its recovery from a sharp selloff last year.

The ringgit is currently trading at its highest in over a year against the dollar, after a torrid 2016 when it ranked as one of Asia’s worst performing currencies.

The ringgit, like some other emerging market currencies, took a hit after Donald Trump won the US presidential race.

Investors feared a rush of capital out of many emerging economies on the view Trump’s policies could prompt a faster pace of US interest rate increases. “The ringgit is now priced more efficiently and increasingly more reflective of Malaysia’s strong fundamentals,” as the influence of external factors have waned, governor Tan Sri Muhammad Ibrahim said in a speech on Friday. A text of the speech was published by the central bank on Monday.

“Nevertheless, questions remain as to why the ringgit is far from reflecting its fair value,” he said. He also announced new measures to boost liquidity in the onshore ringgit market. These include extending the short-selling framework to include Malaysian Government Investment Issue, expand eligible collateral for banks’ liquidity operations, and introduce Bank Negara Interbank Bills (BNIBs) in ringgit and foreign currencies.

Last November, as the ringgit plunged to its weakest in more than 12 years in offshore markets, Bank Negara demanded that banks sign a commitment to cease trading the local currency on the offshore non-deliverable forward market.

Read more at https://www.thestar.com.my/business/business-news/2017/11/20/bank-negara-governor-says-ringgit-is-not-fairly-valued/#Q6I1h28UkaTHtJFe.99

Is Ringgit or MYR fairly valued?

There is a positive correlation between the Malaysian Ringgit and Brent (USD). Since Malaysia is a net oil exporter, positive movements in Brent are envisaged to translate into positive movements in the Ringgit (although this may not be the case at times – as shown below, there appears to be certain divergent zones).

MYR vs Brent.png

The following simple regression analysis highlights a relatively low r-square (i.e the data are not close to the fitted regression line).

Regression Analysis.png

Based on the above regression results (strictly for illustrative purposes only), it appears that there is potentially ‘more upside’ in the Ringgit (since the forecast MYR is higher than the actual value given the current brent crude price).

Actual vs Forecast USDMYR (1 Jan 2015 - 22 Nov 2017).png

The following desktop scenario analysis further highlights the potential undervaluation of the Ringgit. Given the variability of the currency and a low r-square (associated with the regression analysis), it is important to note that the 95% confidence interval is estimated to be between $3.499 and $4.483.

Scenario Analysis.png

It is important to note that the movements in a currency are impacted by numerous macro and specific factors (not limiting to the one single factor, e.g Brent, etc). 

 

DISCLAIMER: THIS IS A PERSONAL BLOG AND SHALL NOT BE RELIED IN WHATSOEVER MANNER BY ANYONE. ALL ARTICLES CONTAINED IN THIS SITE ARE STRICTLY 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, COMPLETENESS AND TIMELINESS. YOU SHOULD SEEK INDEPENDENT AND PROFESSIONAL INVESTMENT ADVICE IN REGARD TO YOUR INVESTMENT DECISIONS. THE AUTHOR MAY HOLD POSITIONS IN THE SECURITIES MENTIONED IN THE ARTICLES.

Is KLCI Running Ahead Of The Ringgit?

One possible global macro tenet that relates to currency, equity and capital flows is that when the performance of equity markets continue to rise, it will attract foreign money flow and capital flows in turn strengthen the currency. Another possible permutation is that future expectation of a depreciating currency will contribute to capital outflow from the capital markets, which in turn will lead to an overall decline in the equity market.

The following graph shows the positive relationship between USDMYR and KLCI from 1 Jan 2015 till present:

KLCI vs USD.png

As shown above, when Ringgit depreciates, the KLCI will fall and vice versa. The following graph depicts a clearer positive relationship between KLCI and Ringgit from a return perspective (since 1 Jan 2015). Nevertheless, are we seeing a possible divergence in the relationship between KLCI and Ringgit, whereby the KLCI has risen way ahead of the movement in Ringgit?

Return Comparison_Updated.png

Given the recent low level volatility in the Ringgit, the KLCI appears to have run ahead of the Ringgit. As per the regression analysis, the actual index value of KLCI of 1,772 is relatively higher than the predicted value of 1,692 (as per regression analysis). It is imperative to highlight that the relationship between KLCI and Ringgit is relatively low at R-squared of ~0.24 (which may be attributable to the divergence).

Regression & Forecast

KLCI forecast

 

Forex News: KUALA LUMPUR (Jan 17): Bank Negara Malaysia’s (BNM) measures taken are bearing fruit in terms of stabilising the foreign exchange market so far. The exchange rate volatility has declined with average ringgit intraday movement narrowing to around 61 points from an average of 82 points in December last year, according to the central  bank.

MYR_VOL.png

 

DISCLAIMER: THIS IS A PERSONAL BLOG AND SHALL NOT BE RELIED IN WHATSOEVER MANNER BY ANYONE. ALL ARTICLES CONTAINED IN THIS SITE ARE STRICTLY 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, COMPLETENESS AND TIMELINESS. YOU SHOULD SEEK INDEPENDENT AND PROFESSIONAL INVESTMENT ADVICE IN REGARD TO YOUR INVESTMENT DECISIONS. THE AUTHOR MAY HOLD POSITIONS IN THE SECURITIES MENTIONED IN THE ARTICLES.

What Is Fair?

The Malaysian Ringgit has fallen significantly against the greenback, and Barclays expects the ringgit to weaken to as much as 5.0 by year-end. Read More . Given the movements in other currencies of its major trading partners, what will be the current fair value range of the Ringgit? Continue reading “What Is Fair?”

China’s Currency War

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.

http://money.cnn.com/2016/01/07/news/economy/global-currency-war-sparked-by-china/

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.

RMB_Trend.png

What is the outlook for RMB?

Slowing economic fundamentals, coupled with global uncertainties will create downward pressure on RMB to further devaluate.

http://www.chinabusinessnews.com/2835-heres-why-yuan-tumbled-to-its-5year-low/

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.

MYRCorr.png

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.

Forecast vs actual.png

The statistical relationship is summarised as follows:

Summary.png

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

 

 

DISCLAIMER: ALL ARTICLES CONTAINED IN THIS SITE ARE 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. THE AUTHOR MAY HOLD POSITIONS IN THE SECURITIES MENTIONED ABOVE. 

How Low Will Pound Go?

On 10 June 2016, I made a prediction on the outcome of the UK referendum which turned out to be quite accurate, with the projected “remain” percentage to be quite close to the actual number. Refer to my post:  https://kenutau.wordpress.com/2016/06/10/brexit-is-very-real/

Post-referendum, we saw a significant decline in Pound / GBP against the USD (current rate at 1.33):

Pound_1.png

Latest news: http://www.cnbc.com/2016/06/27/major-banks-cut-sterling-forecasts-after-brexit-vote.html

The currency hit its lowest in nearly 31 years in the early hours of Friday after the referendum results were announced that sent shockwaves across all asset classes globally. However, on Monday sterling further fell below the 31-year low to $1.3221 on speculation that the Bank of England may proceed with a rate cut. Sterling is also at its lowest against the euro since March 2014 at 83.41 pence.

“The move in sterling against the dollar after the U.K. referendum is unprecedented,” John Bilton, global head of multi-asset strategy at JP Morgan Asset Management told CNBC via email

A number of banks have cut their sterling forecast since the vote to leave the EU was announced on Friday. HSBC was the first to announce a change to its sterling outlook. The bank said it expects the currency to fall to $1.25 against the dollar in the third quarter and to $1.20 by year-end.

 

So how low can GBP go?

Since UK is well-connected with the EU region, let’s explore the historical relationship between USD/GBP and EUR/USD to determine the potential trading range of USD/GBP. We did a quick regression analysis between the two currencies for data points (since 1 Jan 1999) and the summary of the results is shown as follows:

Pound_4.png

As shown below, the actual USDGBP rate is trading relatively lower than of the forecasted rate of USDGBP based on the results of the regression analysis.

Pound_2.png

As summarised below, the current rate of 1.33 is below the forecasted rate of 1.5881 and it is very close to the lower bound of the 95% confidence interval of 1.3187 – 1.8576.

Pound_3.png

If you believe that the market has overreacted to BREXIT, the Pound / GBP is poised to rebound. Further, based on a 95% confidence interval, the downside risk is fairly limited. Nevertheless, since BREXIT is an unprecedented event, the ordinary statistical analysis may not be able to capture the full extent of market events resulting from BREXIT.

DISCLAIMER: ALL ARTICLES CONTAINED IN THIS SITE ARE 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. THE AUTHOR MAY HOLD POSITIONS IN THE SECURITIES MENTIONED ABOVE. 

Export Stocks: Jumping On The Bandwagon

The Ringgit is weakening. Buy export stocks. Hang on, do we just jump on the bandwagon and chase after the export stocks?

For year 2016, research reports as well as investment websites / news / magazines have been advocating the common theme “Ringgit is falling, buy export counters”. Seriously, is Ringgit or MYR going to collapse? What about the imminent global recession, wouldn’t that affect the demand for our exports (i.e cheap Ringgit doesn’t mean everything)? To some extent, a falling currency would help the export market but the equation is not as simple as it is. In this simple desktop analysis, we would like to examine 5 popular Malaysian export stocks, namely: Top Glove (gloves), Kossan Rubber (gloves), Karex (condom), Inari Amertron (technology) and Latitud Tree (furniture). We hope to shed some light on the following questions:

  1. In light of a depreciating Ringgit, how have these stocks performed thus far?
  2. What is the statistical relationship / formula that can be analysed between the share price of these stocks and Ringgit?
  3. What are market’s expectations about the Ringgit?
  4. Are these stocks over or undervalued if compared to their predicted value as per the derived statistical formula?

What has happened since Jan 2015?

Export stocks 1

Using a common base of 100.0 (since 1 Jan 2015), Top Glove has outperformed the other 4 export stocks. Latitud Tree came in for the second spot. In a nutshell, it does show that the depreciating MYR/USD had created positive momentum for these stocks. Beginning early 2016, these stocks are  ‘correcting’ due to strengthening of the Ringgit.

Statistical Analysis

Regression analysis is performed between the share price of these 5 export stocks and the MYR/USD (since 1 Jan 2015):

Export stocks 2

Export stocks 3

Each stock has its own derived statistical formula which may predict the target price of the stock based on MYR/USD.  The statistical results are summarised as follows:

  1. The gloves counters appear to have stronger relationship with the movement of MYR/USD as Top Glove’s r-squared is at 0.73 whilst Kossan Rubber is at 0.81
  2. The other three export counters have r-squared of more than 0.5, which is more than 50% of the movements can be predicted.
  3. Based on actual MYR/USD exchange rate of RM4.165, it appears that all selected export stocks (except for Kossan Rubber and Latitud Tree) are trading relatively higher than the predicted values as per their derived statistical formulas.
  4. Based on the statistical formula, we can back out the implied MYR/USD from the current trading price of the stocks.  The implied MYR/USD range is  between RM3.87 – RM4.415, with an average of RM4.176.

Key Implications

This is a simple analysis. A detailed fundamental analysis is required on each stock. The derived formula is not perfect, as further fine-tuning of the statistical relationship is required. More importantly, even if the Ringgit is depreciating, it does not mean that the export market will increase as global demand will be affected if global economy faces recession. Further, prevailing negative yields around the globe may lead to the strengthening of 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.