FX Research – RM Peg?

v Ringgit Malaysia (RM) broke RM4.00 threshold and it remains unclear how far it will likely to depreciate from here given the plunging external reserves, looming Fed rate hikes, ongoing decline in crude oil prices and the devaluation of China’s currency. Concerns are resurfacing if Bank Negara may reintroduce currency peg to curb speculative pressure.

v Our macro and market analysis detects no major stress signs to suggest for RM peg possibility. Compared to the 1997/98 Asian financial crisis, the depletion of foreign exchange reserves is more severe this time but we take comfort from stability in industrial production and M1 growth.

v We argue that RM is not fundamentally flawed but suffering from a bout of bad sentiment. Equity market, which decline by 18% from its recent peak may worth a second look judging from its historical price-to-book basis. Meanwhile, the 3-month KLIBOR stays stable at 3.69% from its recent peak of 3.86% compared to an average increase of 360 basis points seen in September 1997 – September 1998.

v Sign post to watch – leverage vulnerability especially household debt of 86% of GDP being the weakest link. Public debt, which stands at 54% of GDP is not comforting.