March 2014

Malaysian Ringgit Bucking the Trend in the Year of the Horse
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.
Singapore Dollar vs Malaysian Ringgit – Chinese Lunar New Year Volatility
SGD/MYR Dec 2013 Jan 2014 % Change
2009 2.4378 2.4313 (0.3)
2010 2.3924 2.3757 (0.7)
2011 2.4415 2.4301 (0.5)
2012 2.5057 2.4968 (0.4)
2013 2.5988 2.6196 0.8

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