Understanding Malaysian Ringgit's Appreciation

Sep 4, 2024

Key Points on the Appreciation of the Malaysian Ringgit

Introduction

  • Discussing the rapid appreciation of the Malaysian Ringgit (MYR).
  • Three key reasons for this trend.
  • Verdict on sustainability of this appreciation.

Key Reason 1: Application to Join BRICS

  • Speculative Optimism: Speculators believe Malaysia's application to join BRICS has contributed to the appreciation.
    • Chart shows a significant rise in MYR in late July 2024.
    • Speculation may not be sustainable; Malaysia is still not a member.
  • Comparison with Egypt:
    • Egypt recently joined BRICS; currency has weakened against USD despite membership.
    • Suggests BRICS membership does not guarantee economic prosperity.
  • Regional Competition:
    • Other countries (Vietnam, Thailand, Philippines) are also interested in joining BRICS, potential dilution of MYR's appreciation.
    • Historical context: Similar appreciation occurred post-Anwar's appointment in November 2022, deemed unsustainable.

Key Reason 2: Anticipation of US Fed Rate Cuts

  • Market Reactions: Asian currencies, including MYR, hit a seven-month high due to expectations of US Federal Reserve rate cuts.
  • Interest Rate Differential: MYR currently offers a 3% overnight interest rate compared to 5.25% in the US.
  • Impact of US Recession:
    • Poor US jobs report raised recession risks; investors expect aggressive rate cuts from the Fed.
    • Lower USD values lead to increased investment in emerging markets (MYR benefits).
  • Historical Trends: Negative correlation between USD strength and emerging market performance; weak USD leads to stronger performance in emerging markets.

Key Reason 3: Strong GDP Results for Malaysia

  • GDP Growth: Malaysia's GDP grew by 5.9% in Q2 2024, surpassing expectations.
    • OCBC revised 2024 GDP forecast upward from 4.2% to 5%.
  • Drivers of GDP:
    • Strong household consumption due to government cash handouts and restructured pension withdrawals (EPF).
    • Significant exports growth—12.3% increase in July, with strong performance in commodities and electronics.
  • Export Competitiveness:
    • Current favorable conditions due to a weaker currency; however, long-term sustainability relies on government actions to boost competitiveness.
    • Top exports: Electronics, petroleum, LNG, and palm oil.

Conclusion and Verdict

  • Correction Potential: 3-5% further correction in MYR possible unless unexpected drastic rate cuts occur.
  • Short-term Outlook: MYR may climb slightly against SGD but long-term trend suggests depreciation.
  • Investment Caution: Advises against urgency in investing in MYR; recovery may not be sustainable.
  • Engagement: Encourages viewers to share opinions on the outlook of MYR.