FX Research – Stressing Ringgit Malaysia

v It is not too difficult to understand how the current slew of negativities, ranging from falling oil prices, fear of wider fiscal deficit, weakening corporate earnings, comments from Petronas CEO over risk of much lower dividend payments and latest 1MDB controversy have enough to sour market sentiment.

v As Ringgit Malaysia being the weakest Asia ex-Japan currency, question asked if the currency is heading to level seen in the 1997/98 Asia financial crisis. Has market finally reached a point where fair valuation matter most?

v Based on our stress tests, we assign low probability for Ringgit Malaysia to go beyond RM3.70 against the US dollar. Our works show that Ringgit Malaysia is most responsive to changes in oil prices followed by sell-off in foreign holding of MGS and narrowing interest rate differential in favour of US.

v  Beyond RM3.70 against US dollar, we argue that it would be a struggling point for Bank Negara between accepting currency weakness as an offset to the fall in oil income to raise export competitiveness against its inflation outlook.