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”

Random Charts : Inflation & Markets

Malaysia central bank sees inflation exceeding 8-year high

The recent spike in Malaysia’s inflation rate  to above the 4.5 per cent rate, is possibly attributable to increased crude prices as well as prevailing weakness in Ringgit. The following charts show the correlation:

Inflation vs Brent

Inflation vs USDMYR.png

Rising inflation will lead to rising yield in the debt markets:

Inflation vs MGS

What does this mean for equity market? Before 2013, debt yield has negative relationship with performance of stock market (i.e in a declining debt yield environment, the stock market tends to do better). Post-2013 onwards, we are seeing a rather mixed relationship between the two markets. Nevertheless, in general, a rising debt yield would tend to mean people would expect a higher return for equity market and as such, this would translate to lower prices for the equity market.

MGS vs KCI

Would inflation continue to rise?

Based on forecast model by TradingEconomics, inflation may have potential mean reversion and may adjust to a lower range of 3.2% – 3.6% by Q3-Q4 of year 2017:

Forecast Inflation.png

DISCLAIMER: THIS IS A PERSONAL BLOG AND SHALL NOT BE RELIED IN WHATSOEVER MANNER BY ANYONE. 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, 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.

Highly Correlated

In today’s posting, we will be exploring two Malaysian-listed stocks that have significant correlation with the movements in the Malaysian Ringgit – HeveaBoard and Poh Huat Resources. Are these stocks over or under valued with respect to the recent weakening in the Ringgit?

Continue reading “Highly Correlated”

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?”

When Will The Egg Hatch?

The key to everything is patience. You get the chicken by hatching the egg, not by smashing it. Arnold H. Glasow

It appears there is a recent oversold position in one of the  Malaysian-listed poultry stocks, Teo Seng Capital Berhad (TSCB). Is the oversold position justified?

Continue reading “When Will The Egg Hatch?”