- The Malaysia Ringgit took a hit from Singapore’s unexpected loosening of monetary policy. The Ringgit had been sliding since 2014 as oil prices retreated and the Fed sought to normalise interest rate.
- MSCI Malaysia IndexSM exhibited a monthly correlation of 0.723 with the Ringgit in the past year. Yet, since December 2014, equities had been surging while the currency had been weakening, heralding a possible decoupling between currency and equities.
- MSCI Malaysia IndexSM exhibited a monthly correlation of 0.723 with the Ringgit in the past year. Yet, since December 2014, equities had been surging while the currency had been weakening, heralding a possible decoupling between currency and equities.
The Singapore’s Monetary Authority of Singapore (MAS) allowed for a loosening of its monetary policy in an unscheduled 28 January statement, “MAS will continue with the policy of a modest and gradual appreciation of the Singapore Dollar Nominal Effective Exchange Rate (NEER) policy band. However, the slope of the policy band will be reduced, with no change to its width and the level at which it is centred.”
The Singapore Dollar fell to a low of S$1.3386 against the greenback and the Malaysian Ringgit fell in tandem. According to analysts, this was a knee-jack reaction by the market in seeking to maintain the cross-rate between Singapore Dollar and the Malaysian Ringgit.
Malaysian Ringgit Goes South
Prior to the retreat of the Singapore Dollar, the Malaysian Ringgit was falling in conjunction with oil prices as the country is a net exporter of oil. The Fed’s hints and statement of increasing interest rate and normalising monetary policies after 5 years of abnormal easing and irregular monetary environment helped to push the Ringgit along with other emerging market currencies lower.
Performance of Malaysia Ringgit against US Dollar
Source: Bloomberg
Initially, the rapid retreat of the Ringgit had an adverse effect on the local equities markets. However, since mid-December 2014, there was a de-coupling between the Ringgit and local equities as measured by the benchmark MSCI Malaysia IndexSM, with the local equities edging up.
Performance of MSCI Malaysia IndexSM
Source: Bloomberg
In the past one year, the Ringgit demonstrated a monthly correlation of 0.723 with MSCI Malaysia IndexSM. Yet weekly correlation since mid-December 2014 to 30 January 2015 returned 0.147. Is this the beginning of a de-coupling between the Ringgit and local equities? Will there be a mean revision to the historical level later?
So far, international fund managers are starting to look favourably upon Malaysian equities.
Maybank IB Research stated that the selling of Malaysian equities by foreign investors is mainly done with and the country remains very much on the radar of investors. “Most of the funds it met had reasonably reduced their exposure to Malaysian equities since the roil on crude oil price began,” it added.
Exchange Traded Funds inflows into Malaysia during the last week of January showed an inflow of US$1.66 million according to Bloomberg, a small comfort for the country which had suffered an outflow of US$41.9 million year-to-date.
Malaysia Feels the Heat as Oil Prices Cool
Malaysia is an oil exporter of oil and lower oil prices will impact Malaysia trade and fiscal balance negatively. An estimated one-third of Malaysia's revenues come from oil and gas exports, so fall in oil prices will mean increased strain on the country's public finances and less money for government to stimulate the economy.
The Malaysian government moved quickly to address the falling oil prices. In January, a revised budget was unveiled with new growth and fiscal deficit targets based on a lower Brent oil price assumption of US$55 (vs. US$100 in Budget 2015).
Growth target was lowered to 4.5-5.5%, compared to 5.0-6.0% previously. Based on the new oil price assumption, the estimated revenue shortfall is RM13.8 billion, though with higher contributions from GST and GLC dividends, the overall drop in revenue is forecasted to be RM12.3 billion. The new fiscal deficit for 2015 for the revised Budget is at 3.2%, slightly higher than the 3% set in the Budget 2015 proposals announced in October last year.
Standard & Poor’s Ratings Services viewed Malaysia’s revised Budget as an indication of the government’s continued focus on fiscal consolidation but warned that low crude oil prices could derail the plan. On the other hand, other analysts took the view that the low oil prices could be a plus for Malaysia. “Malaysia can benefit from the recent fall in global oil prices, particularly if global demand is aided by higher discretionary incomes, which then feed into export demand, says CIMB Economics Research in a report earlier.
Nonetheless, the US’ possible rate hike in the later part of the year could see more headwinds for Malaysian equities and currency. The volatility of oil prices is also another area of uncertainty. Oil prices, since the end of January saw an upsurge as the number of idle rigs in US soared.
The SGX MSCI Malaysia Index Futures Contract
On 9 February 2015, the SGX MSCI Malaysia Index Futures contract will commence trading on SGX. Two serial month contracts (February and April 2015), and four quarterly month contracts (March, June, September and December 2015) will be listed on the first day of trading. The SGX MSCI Malaysia Index Futures contract is a quanto futures contract denominated in US dollars and has a notional contract value of approximately US$12,570.
International investors are able to gain exposure to the Malaysia market using the SGX MSCI Malaysia Index Futures contract without subjecting themselves to the corresponding risk of any adverse exchange rate fluctuation between US Dollar and Ringgit. The full contract specifications of the MSCI Malaysia Index Futures contract can be found here.
With the addition of the SGX MSCI Malaysia Futures, SGX’s Southeast Asian (ASEAN’s) derivatives suite now offers coverage of Singapore, Indonesia, Malaysia, Thailand and Philippines, which collectively represent over 85% of ASEAN’s gross domestic product.