Malaysian Ringgit
Kim Adragna
Tracy Bush
Maya Kushner
Alicja Loveday
Where is Malaysia?
Brief History of the Ringgit
• Asian Financial Crisis 1997
– Ringgit pegged at RM3.8/USD
– July 21, 2005: Highly managed float
– Bank of Negara
• Current Exchange Rate: RM3.6588/USD
• Forecasted to strengthen short and long
term
• Country Risk Assessment
– CPI: 5.1
Technical Analysis
Technical Analysis
• Short term based analysis forecasting
– I week into the future
• Using the three models
– Market Momentum Analysis
– Moving Average Rules
– Bollinger Band Analysis
• Data shows a strengthening currency
– I week forecast at about RM3.660/USD
Market Momentum Analysis
Malaysian Ringgit (MYR): Last 1year (Inverted Scale)
Market Momentum Analysis
Malaysian Ringgit (MYR): Last 91 days (Inverted Scale)
Market Momentum Analysis
Malaysian Ringgit (MYR): Last 31 Days, (Inverted Scale)
Moving Average Rate
Moving Average Rules (variations of market momentum)
MYR Spot to 180-day moving Average (Inverted Scale) Over Last 12 months
Bollinger Band Analysis
MYR Bollinger Bands over last 6 months (90-day Average green line)
(Inverted scale)
PACIFIC Exchange Rate Service
Bollinger Band Analysis
MYR Bollinger Band over last 3 months (90 days Average green line) (Inverted Scale)
PACIFIC Exchange Rate Service (inverted scale)
Non-Parity Models
Asset Choice Model & Balance of Payments Model
Central Bank Officials
“The Islamic banking industry, that consists of both
dedicated Islamic banks and Islamic banking
schemes in the conventional banks, continues to
show commendable performance with profitability
and assets surpassing for the first time the
threshold of RM1 billion and RM100 billion
respectively at the end of 2005. The industry has
become a major contributor to the overall
economic growth, with assets equivalent to nearly
25% of the country's gross national product.”
~Zamani Abdul Ghani~
Deputy Governor of the Central Bank of Malaysia
7 April 2006
Central Bank Officials
“…Malaysia's growth prospects are expected to
strengthen in 2006. The favorable external
demand would reinforce the sustained expansion
in domestic demand, which is expected to be
positive for both real income and employment
generation…real private investment is forecast to
expand…As a result of both supportive external
and domestic demand, the economy is expected to
register improved performance in 2006.”
~Dr Zeti Akhtar Aziz~
Governor of the Central Bank of Malaysia~
17 February 2006
Central Bank Officials
“For Malaysia, the focus of policy thrusts in 2006 would be to
build on the gains of 2005, ensuring fundamentals are
strengthened and the flexibility of the economy is further
enhanced. In this respect, the Central Bank will determine
the interest rate policy to provide a sound environment for
sustainable performance of the economy. Macroeconomic
policy would thus continue to stress growth in an
environment of price stability…Further efforts will therefore
be undertaken to ensure that the economic and financial
structures and systems are conducive for the building of a
dynamic, resilient and flexible economy.”
~Dr Zeti Akhtar Aziz~
Governor of the Central Bank of Malaysia~
17 February 2006
Asset Choice Model
2001
Short-Term Interest Rate* 3.1
Exchange Rate (end-period) 3.8
2002
2.9
3.8
2003
2.9
3.8
2004
2.8
3.8
* 3-month interbank rate
Last 5-Years
4
3.5
3
2.5
2
1.5
1
0.5
0
2001
2002
2003
Short-Term Interest Rate*
2004
Exchange Rate (end-period)
2005
2005
2.9
3.8
Asset Choice Model
Short-Term Interest Rate*
Exchange Rate (end-period)
Nov-05 Dec-05
2.9
3.2
3.8
3.8
Jan-06 Feb-06
3.2
3.8
3.7
* 3-month interbank rate
Recent 4-Months
4
3.5
3
2.5
2
1.5
1
0.5
0
Nov-05
Dec-05
Short-Term Interest Rate*
Jan-06
Feb-06
Exchange Rate (end-period)
Asset Choice Model
(Equity Market Performance)
Stock Market Index
(4/4/1986=100)
2001
696.1
2002
646.3
2003
793.9
2004
907.4
Stock Market Index
1000
900
800
700
600
500
400
300
200
100
0
2001
2002
2003
2004
Stock Market Index (4/4/1986=100)
2005
2005
899.8
Asset Choice Model
(Equity Market Performance)
Nov-05
896.1
Stock Market Index
(4/4/1986=100)
Dec-05 Jan-06 Feb-06
899.8
914.0
923.9
Stock Market Index (4/4/1986=100)
930
925
920
915
910
905
900
895
890
885
880
Nov-05
Dec-05
Jan-06
Stock Market Index (4/4/1986=100)
Feb-06
Balance of Payments
($US billion)
2001
14.2
7.3
Trade Balance*
Current Account Balance
2002
14.3
8.0
2003
21.4
13.3
2004
21.2
14.9
2005
26.3
20.4
2006 p
37.6
23.7
* based on customs-clearance
Balance of Payments
45
40
35
30
25
20
15
10
5
0
2001
2002
2003
Trade Balance
2004
2005
Current Account Balance
2006 p
2007 p
2007 p
40.9
26.0
Parity Models
Purchasing Power Parity & International Fisher Effect
Relative PPP: Calculation
Spot Rate: USD/RYM
R3.78
Annual Inflation Rate: U.S.
3.8 %
Annual Inflation Rate: Malaysia 3.7%
• For currency quoted in European terms:
Future spot rate = 3.78 (1+.037)5/(1+.038)5
• Future Spot rate = 3.761827
Relative PPP: Analysis
• In recent years, the inflation rates of Malaysia
and U.S. have been very close.
• Thus, the Relative PPP model, suggests that the
Malaysian Ringgit will appreciate against the
U.S. Dollar, but not very much and not very fast.
• Hence, according to this model, we recommend
that companies that wanted to expand their
operations into Malaysia do so now. The
circumstances are favorable for that, because a
stable exchange rate helps minimize economic
and translation exposures, which are otherwise
difficult to measure.
Absolute PPP: Calculation
• Weighted Basket
Item
9 Poster
USD
MYR
$224.91
R153.00
15 Dictionary
$233.55
R852.45
3 Flowers
$254.97
R399.00
16 Pizza
$232.00
R208.00
1 Hotel
$235.75
R161.00
$236.24
R354.69
Average
• The Malaysian Ringgit is
quoted in European Terms.
Therefore, the PPP exchange
rate = ringgit price/dollar price.
• Using this weighted basket,
the exchange rate is R1.50 per
$1.
Absolute PPP: Analysis
• The current exchange rate
obtained from bloomberg.com
is USD/MYR 3.6588.
• Using the formula: (spot rate –
PPP rate)/spot rate = (3.6588 –
1.5014)/3.6588 = 0.5896
• From this, we find that the
Malaysian Ringgit is
undervalued by about 59%.
• Since the currency is so
grossly undervalued, it is
reasonable to expect that the
Ringgit will strengthen in the
future.
• This conclusion is supported
by looking at the trend of the
exchange rate for the year
2006:
International Fisher Effect
Current Spot
Int Rate Malaysia
Int Rate US
IFE Spot =
RM3.78/USD
3.78%
4.3967%
3.6697
Strengthening over 5 year period
Implications
• Short & Long Term: Strengthening Ringgit
– Highly managed, unlikely to change
• Company Manufacturing in Malaysia
– Risk
• Transaction & Manufacturing Costs
• Company Selling to Malaysia
– Benefit
• Hedge Fund
– Benefit: Long Position
– Risk: Short Position
Recommendations
• Company Manufacturing in Malaysia
– 30 Day Money Market Hedge
– Long Term Liabilities: Forward Long Contract
• Company Selling in Malaysia
– Benefits in strengthening Ringgit
• Hedge Fund
– Open Long Position
– Options not recommended