Wednesday, October 4, 2017

Chart of the Week: Valuing the Ringgit

I’ve done this exercise once before (see here), but this way is probably a lot more intuitive for most people. The TL:DR version – the Ringgit is undervalued, but not by much:


The chart above has the USDMYR exchange rate on the right, and the Fed’s USD broad nominal effective exchange rate on the left, from 2005 to the present. The correlation is very close – better than 95%. In other words, almost all the variation in the MYR exchange rate has come from movements in the USD rather than factors idiosyncratic to the MYR.

I won’t say that the gaps between the lines are good measures of the MYR’s over- or under-valuation, but they are indicative. In the MYR’s recent history, there’s been two episodes of obvious misalignment, roughly from mid-2015 to early-2016, and from the end of 2016 to the present.

The first you can probably call the 1MDB effect, and just like in my previous exercise, you can say it was indeed a factor in pushing down the MYR. However, the effect was short-lived, again roughly coinciding with the sale of Edra Energy.So to the idea that 1MDB, and Malaysian governance generally, has any bearing on the Ringgit exchange rate: please go away. You’re not relevant anymore.

The second coincided with the US elections and probably more pertinently, BNM’s reaction to the change in global capital flows it triggered. I’d call this the fear-of-capital-controls effect. It’s still persisting, and I’d call it a roughly 5% deviation from where the MYR should be (around RM4.00 to the USD).

The bottom line is: Yes, the Ringgit is undervalued, but probably not as much as people think.


  1. Interesting observation , is that spearman coefficent ?
    I also notice ringgit also move in tandem with australian dollar , i guess it is because we are all commodity export nation.

    1. @Steve Low

      It's Pearson. Spearman rank correlation is 0.92.

      Spot on about the AUD. The MYR actually floats in tandem with quite a few other energy exporters such as Canada and Mexico. I'm being a bit more specific here because commodity prices aren't always correlated between different categories.

  2. Great reading as usual, Hisham. I'm a new visitor to your blog, and find your writing thought-provoking, if not ever-so-slightly pro-establishment. It's hard to articulate why I believe the latter, but that's the feeling I derive from reading quite a few of your posts. In any case, I'm merely voicing a personal, subjective, opinion and it isn't intended as a critique of your writing.

    To the point about this post, and it may require some venturing into the realm of speculation.

    Would you have any thoughts as to why the Ringgit remains anaemic, given the large swaths of rosy macroeconomic news the country has been enjoying. I trade financial markets, and am familiar with the excessive swings which often affect financial assets, but I still find the recent behaviour of the currency puzzling. BTW, while I have very strong views about the 1MDB issue, I don't believe that it or any governance issue has much or any bearing on the Ringgit's performance.


    1. @Kris

      Thanks. Technically, you could say I'm part of the establishment, given where I work.

      On the Ringgit performance, I think it's essentially fear of capital controls that are holding back foreign investors. Some have come back into the market, but others haven't.

      An alternative interpretation: after BNM shut down the NDF market, the exchange rate has been primarily driven by fundamental flows. But at that point in time, the Ringgit was undervalued, and as a result will continue to remain so, as there's less capital flow arbitrage to bring it in line with economic fundamentals.