Malaysian Ringgit

Kim AdragnaTracy Bush

Maya KushnerAlicja 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 AnalysisMalaysian Ringgit (MYR): Last 1year (Inverted Scale)

Market Momentum AnalysisMalaysian Ringgit (MYR): Last 91 days (Inverted Scale)

Market Momentum AnalysisMalaysian Ringgit (MYR): Last 31 Days, (Inverted Scale)

Moving Average RateMoving Average Rules (variations of market momentum)

MYR Spot to 180-day moving Average (Inverted Scale) Over Last 12 months

Bollinger Band AnalysisMYR Bollinger Bands over last 6 months (90-day Average green line)

(Inverted scale)

PACIFIC Exchange Rate Service

Bollinger Band AnalysisMYR Bollinger Band over last 3 months (90 days Average green line) (Inverted Scale)

PACIFIC Exchange Rate Service (inverted scale)

Non-Parity ModelsAsset 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

Last 5-Years

0

0.5

1

1.5

2

2.5

3

3.5

4

2001 2002 2003 2004 2005

Short-Term Interest Rate* Exchange Rate (end-period)

2001 2002 2003 2004 2005 Short-Term Interest Rate* 3.1 2.9 2.9 2.8 2.9 Exchange Rate (end-period) 3.8 3.8 3.8 3.8 3.8 * 3-month interbank rate

Asset Choice Model

Recent 4-Months

0

0.5

1

1.5

2

2.5

3

3.5

4

Nov-05 Dec-05 Jan-06 Feb-06

Short-Term Interest Rate* Exchange Rate (end-period)

Nov-05 Dec-05 Jan-06 Feb-06 Short-Term Interest Rate* 2.9 3.2 3.2 - Exchange Rate (end-period) 3.8 3.8 3.8 3.7 * 3-month interbank rate

Asset Choice Model(Equity Market Performance)

Stock Market Index

0

100

200

300

400

500

600

700

800

900

1000

2001 2002 2003 2004 2005

Stock Market Index (4/4/1986=100)

2001 2002 2003 2004 2005 Stock Market Index (4/4/1986=100)

696.1 646.3 793.9 907.4 899.8

Asset Choice Model(Equity Market Performance)

Stock Market Index (4/4/1986=100)

880

885

890

895

900

905

910

915

920

925

930

Nov-05 Dec-05 Jan-06 Feb-06

Stock Market Index (4/4/1986=100)

Nov-05 Dec-05 Jan-06 Feb-06 Stock Market Index (4/4/1986=100)

896.1 899.8 914.0 923.9

Balance of Payments($US billion)

Balance of Payments

0

5

10

15

20

25

30

35

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45

2001 2002 2003 2004 2005 2006 p 2007 p

Trade Balance Current Account Balance

2001 2002 2003 2004 2005 2006 p 2007 p Trade Balance* 14.2 14.3 21.4 21.2 26.3 37.6 40.9 Current Account Balance 7.3 8.0 13.3 14.9 20.4 23.7 26.0 * based on customs-clearance

Parity ModelsPurchasing Power Parity & International Fisher

Effect

Relative PPP: Calculation

• For currency quoted in European terms:

Future spot rate = 3.78 (1+.037)5/(1+.038)5

• Future Spot rate = 3.761827

Spot Rate: USD/RYM R3.78

Annual Inflation Rate: U.S. 3.8 %

Annual Inflation Rate: Malaysia 3.7%

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 • 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.

Item USD MYR

9 Poster $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

Average $236.24 R354.69

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

Strengthening over 5 year period

Current Spot RM3.78/USDInt Rate Malaysia 3.78%Int Rate US 4.3967%

IFE Spot = 3.6697

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