The Singapore
Dollar and Malaysian Ringgit (SGD/MYR) commonly fluctuates in a wider
band than usual during the period of Chinese Lunar New Year. In 2014
the relationship has departed ever so slightly from this trend, as
Malaysians working abroad conduct remittances and the usually well
offered currency pair instead drifted higher in preparation for the
fifteen day celebration.
The SGD/MYR has depreciated by half a basis point on average over the
past five years during Chinese Lunar New Year celebrations, yet this
year that has not eventuated. The SGD/MYR was little changed and in
fact moved in the opposite direction to normal movements of the
currency pair over the last five years. This has surprised analysts
and businesses hedging their FX exposure, but delighted Singaporeans
who travelled to Malaysia for the festival.
Several variables are influencing the currency pair and causing a
break in the long running trend. This provides an interesting
perspective on the erratic movements of the closely monitored currency
pair and highlights the difficulty Asian businesses face in managing
their business FX exposure.
The Malaysian Ringgit fell to a record low against the Singapore
Dollar in the lead up to the Chinese Lunar New Year festival,
declining almost six percent since the beginning of last year and over
one percent since the beginning of 2014.
One important reason cited as a catalyst for reduced volatility of the
SGD/MYR currency pair is the resurgent strength of the US Dollar. It
has a close relationship with the Singapore Dollar in that it can
serve to effectively prop it up. This keeps the Singapore Dollar
artificially high despite the historical trend for increased buying
and remittances by Singaporeans at the beginning of each year. The MYR
has depreciated consistently against the SGD and USD since the US
Federal Reserve announced quantitative easing would be tapered over
the course of 2014. |
Another
contributing factor is the safe haven status of the Singapore Dollar
compared to the Malaysian Ringgit. Declining confidence in emerging
markets growth and growing concern over the geo-political stalemate
between the Ukraine and Russia will continue to exacerbate the
disparity between the two currencies.
Placing further pressure on the Malaysian Ringgit is the ability of
the country’s banking sector to maintain strong earnings growth in the
midst of an increasing level of risk assets and higher scrutiny of
capital adequacy ratios. Malaysian banks have consistently improved
over the last five years, yet government reforms targeting inflation
edging above two percent, rising residential housing prices and
endemic domestic debt could prove a significant stumbling block to
ongoing success.
Malaysia carries a much higher GDP-to-debt ratio than Singapore, close
to 90 percent and ranking as one of the highest in Asia compared to
Singapore’s GDP-to-debt ratio near 60 percent, figures from the World
Bank show.
The relative strength of the Singapore Dollar against the Malaysian
Ringgit has not yet resulted in a spike in property investments across
the causeway, but restrictions over non-residents purchasing expensive
properties and a hike in Property Gains Tax may be the reason behind
the lack of expected activity.
The Malaysian government has maintained a strong stance on improving
the current account deficit to gross domestic product ratio, with a
resultant increase in exports expected to provide some support for the
Ringgit against the Singapore Dollar.
Suggestions the Malaysian central bank could increase interest rates
in 2014 from the current level of 3 percent, held since mid-2011,
could also adversely affect the ever changing dynamic between the
Malaysian Ringgit and Singapore Dollar. |
