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.

Benchmarking Ringgit

Latest News: The dollar has reached the long-term support level near 0.93 identified on the U.S. dollar index chart several weeks ago. That is a critical support level. Below this support level lies the abyss with the next solid support near 0.83. However, the weekly chart puts the dollar behavior into a wider context. The dollar index chart has been dominated by a very broad sideways trading band that started in March 2015. The upper level of the band is resistance near 1.00. The lower edge of the band is support near 0.93. If support holds near 0.93 then traders will watch for a rebound rally and a retest of resistance near 0.97. That behavior will signal a continuation of the trading band behavior. Failure of support near 0.93 plunges the global economy into an unwelcome and unwanted currency war. Read More

Given the current circumstances, how should we view the Malaysian Ringgit (MYR)?

Continue reading “Benchmarking Ringgit”

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 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.