Dr. Mohd Afzanizam Abdul Rashid Chief Economist 03-2088 8075 afzanizam@bankislam.com.my Sensing the ringgit MYR/USD now at RM3.973 The appreciation of ringgit against the US Dollar (MYR/USD) has been forthcoming. The MYR/USD is currently hovering at RM3.9733, giving 1.84% rise compared to end of December 2017. Similarly, the MYR has also appreciated by 1.24% against the Singapore Dollar (SGD) to RM2.9909. At the current juncture, the MYR/USD is the second best performing currencies after Thai Baht (THB). The question now whether the strengthening of MYR would have more legs to go especially when the prospect of rate hike in the US is still fairly uncertain. Thus far, the base case for the rate increases in the US is three times, totaling 75 basis points. This would bring the current Federal Fund Rate (FFR) at 1.50% to 2.25% by end of the year. However, the recent approval of tax reforms implies that fiscal stimulus would provide strong support to the US growth which could exacerbate the inflationary pressures. This essentially would alter the base case and the Fed could opt for more than three hikes should inflation rate persistently stays above the 2% target. Indeed, it is very tempting to say that the MYR/USD would appreciate further in view of the expected increase in the Overnight Policy Rate (OPR). We have already penciling in a 25 basis points increase in the OPR which would bring the policy rate from 3.00% to 3.25% sometime in the 1H2018. While higher crude oil prices to USD69.26 per barrel (End of 2017: USD66.87 per barrel), also suggests that the Government of Malaysia (GOM) would have the financial muscle to spend and could solidify its current rating of A3/A-. Therefore, it is high time for us to look at some of the pertinent points before we make any conclusion. Chart 1: MYR/USD 4.6000 4.4000 4.2000 4.0000 3.8000 3.6000 3.4000 3.2000 3.0000 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 For Internal Circulation Page 1
Chart 2: SGD/MYR 3.3000 3.2000 3.1000 3.0000 2.9000 2.8000 2.7000 2.6000 2.5000 2.4000 1/1/2014 1/1/2015 1/1/2016 1/1/2017 1/1/2018 Source: CEIC It s always about the flows Economic fundamental aside, fund flows from abroad has been very receptive to Malaysian assets. For example, the net inflows from the foreign institutional investors into the equities market stands at RM11.1 billion in 2017 after experiencing three consecutive years of net outflows (see Chart 3). Meanwhile, net flows for fixed income were generally in negative territory in 2017 (see Chart 4). However, there was a net inflow during the last two months during the year (see Chart 5). So this could well explain why the ringgit has been bullish as demand for the currency has improved. To a large extent, the undervaluation of MYR may have contributed to the appreciation. The average of MYR/USD since July 2005 (the month when the ringgit peg was removed) until now is about RM3.52. Assuming mean reversion could happen, the MYR/USD should be moving towards its average values (see Chart 6). Chart 3: Net flows from foreign institutional investors in equities (RM million) 20,000 15,000 10,000 5,000 - (5,000) (10,000) (15,000) (20,000) (25,000) 15,226 2,236 13,817 2,995 (6,611) (19,380) (2,938) Source: CEIC For Internal Circulation Page 2 11,117 2010 2011 2012 2013 2014 2015 2016 2017
Chart 4: Net flows from foreign investors in fixed income (RM million) 70,000 60,000 50,000 40,000 30,000 20,000 10,000 - (10,000) (20,000) Source: CEIC 60,928 51,742 43,511 22,304 8,031 825 (8,313) (7,975) (11,270) 2009 2010 2011 2012 2013 2014 2015 2016 2017 Chart 5: Monthly net flows for fixed income market (RM million) 15,000 10,000 5,000 - (5,000) (10,000) (15,000) (20,000) (25,000) (30,000) (3,894) (7,291) (26,219) 10,078 6,781 (330) (2,263) (745) 9,341 (2,775) 6,688 2,653 Source: Strategic Management, Bank Islam Chart 6: MYR/USD since July 2005 5.0000 4.5000 4.0000 LT average@ RM3.52 3.5000 3.0000 2.5000 For Internal Circulation Page 3
What the technical charts has to say? Based on the Fibonacci retracement chart, the current support level should be at RM3.8208 after MYR/USD breached the previous support level of RM3.9812 (see Chart 7). There is possibility that MYR/USD could move towards this level especially when foreign funds continue to come in and the perceived undervaluation remains. However, the Relative Strength Index (RSI) and Stochastic (see Chart 8 & 9) charts has been flashing an overbought position for MYR (or oversold position for USD). Therefore, we can expect some profit taking to kick in along the way. In a nutshell, it would take some time to reach the next support level i.e. RM3.8208. Chart 7: Fibonacci retracement levels Previous support level @ RM3.9812 Current support level @ RM3.8208 For Internal Circulation Page 4
Chart 8: Relative Strength Index (RSI) Overbought position for MYR or Oversold position for USD Chart 9: Stochastic Overbought position for MYR or Oversold position for USD Our view Given the current strength of the ringgit, we are revising our earlier calls of RM4.00 RM4.10 to RM3.95 RM4.05 by end of 2018. We believe the ringgit has been severely battered since 2014 and to a large extent the current valuation does not reflect the fundamentals of the Malaysian economy. The country s fortress i.e. the banking system has been solid compared to the Asian Financial Crisis 1997/98 whereby the banks are sufficiently (in fact more stringent) capitalised. The liquidity condition measurement has also evolved with the introduction of Liquidity Coverage Ratio (LCR) in 2015 and soon the Net Stable Funding Ratio (NSFR) in 2019. These measures will ensure the risks of a credit crunch (as what happened to the global economy during Sub Prime Crisis in 2007 & 2008) will be greatly reduced and contained. For Internal Circulation Page 5
For some reasons, this factor was underappreciated given the fact that the early compliance of LCR among the banks in the Malaysia. Therefore, there could be some mispricing of ringgit which eventually be corrected by the market forces. Chart 10: Liquidity Coverage Ratio (LCR) 150% 140% 139% 130% 120% 110% 100% 90% 80% Source: BNM Produced and issued by BANK ISLAM MALAYSIA BERHAD (Bank Islam) for private circulation only or for distribution under circumstances permitted by applicable laws. All information, opinions and estimates contained herein have been compiled or arrived at based on sources and assumptions believed to be reliable and in good faith at the time of issue of this document. This document is for information purposes only and has no regard to the specific investment objectives, financial situation or particular needs of any specific recipient. No representation or warranty, expressed or implied is made as to its adequacy, accuracy, completeness or correctness. All opinions and the content of this document are subject to change without notice and may differ or be contrary to opinions expressed by other business areas or groups of Bank Islam as a result of using different assumptions and criteria. No part of this document may be used, reproduced, distributed or published in any form or for any purpose without Bank Islam s prior written permission For Internal Circulation Page 6