Monday, November 14, 2016

4 Thoughts for the Week

GDP Report

Surprisingly strong at 4.3% yoy…or may be not. Iwas expecting a pickup as we had the minimum wage revision, civil service pay revision, cut in the OPR and cut in the EPF contribution rate. The end result was a 6% (qoq SAAR), which is the best quarterly growth rate since 4Q2014. I haven’t delved into the details yet (the bond market tantrum is occupying my working hour attention at the moment), but apparently there was a pretty decent growth contribution from external trade as well.

Donald Trump as POTUS

My first reaction was…


…but after sincere reflection and a weekend to think it over, it’s still…


Market Reaction

The global bond market selloff was I think driven by two things:

  1. Investors were positioned for a Clinton win, which in the event of a Trump win meant everyone was essentially out of position. That caused a somewhat panicky rebalancing of global bond and equity portfolios. The main thesis was a Trump presidency would benefit certain sectors (like energy) and cost others (like tech) more than Clinton’s policy platform. Hence the largely positive reaction of US equity markets (Dow up, S&P marginally up, Nasdaq down). The overall higher level of fiscal spending, given that the US economy is near full employment already, would also drive down bond prices (excess supply of government bonds) while simultaneously raising inflation expectations. Hence the Treasury market selloff.
  2. Trump’s position on trade is unequivoically negative for all US trade partners. Hence the selloff in most emerging markets, and Malaysia is no exception. As to why the Ringgit moved more than most: the bigger the party, the bigger the mess you have to clean up afterwards. I never thought the strengthening of the Ringgit over the 1H2016 was sustainable. It was driven by two things, which was the inflow of cash from 1MDB related asset sales and bond market positioning for a BNM rate cut. The former was a one-off, and the latter looks to be off the table (for now).

FX markets

As of this writing, the Fed hasn’t yet released the numbers on the USD trade weighted index for last week, but I don’t doubt its showing an appreciation of the USD against everyone else.

Let me put all this ruckus in a bit of perspective. This is the Fed’s broad nominal and real indexes for the USD (index numbers, 1990-2016, monthly average):


From a technical perspective, the log difference between the nominal and real indexes can be taken as a measure of over- or under-valuation of a currency. Here’s what that particular measurement looks like for the USD (log difference):


The USD has been overvalued since the early 1990s, and the misalignment has been getting stronger since the GFC. Here’s the equivalent charts for the MYR:



The Ringgit looks undervalued, but not by much.

Lastly, here’s my preferred valuation index for the MYR – an equal weight index against the AUD, CAD and MXN (index numbers, 1992-2016, monthly average):


On this measure, the Ringgit doesn’t look particularly weak either. Equivalently, you could say that the Ringgit’s peers are all equally weak. Either way, it doesn’t look like global investors are treating the Ringgit any differently than any other currency with the same economic structure.


  1. so you're saying that we're still sitting pretty?

    1. @dukuhead

      Under no circumstances would I consider a Trump presidency leaving us "sitting pretty".

  2. 1) On Trump -- one of my bosses asked us in the office on the POTUS election day "why do we never learn? Didn't Brexit warm us up?"

    After 2 shocking rounds, opinion polls are evidently a self-defeating practice. "Winners" will become complacent, "losers" will fight to the end, while the "undecided" ones tend to sympathize the loser.

    On hindsight, everything seems so obvious (like Bernie should be nominated) lol

    Anyway, however jerky Don is, he is hell of a great salesman. He's able to sell a radical dream to 61.4 million people and getting the up-front payment with no guarantee of product delivery.

    2) On Ringgit undervaluation -- interesting charts and points. I always thought that our Ringgit is fundamentally undervalued from the angle of "it's cheap for the MNCs to set up factory and hire here now", I still think that way though.

    Nonetheless, currency is the hardest-to-understand creature in the world after women. At least, both always revert back to mean over the long run, however volatile they are in short run.

  3. @Warrior

    1. Energy is energy, regardless of source. You might want to check out both Canada's and Australia's LNG exports.

    2. Manufacturing is not relevant to exchange rates (the causality actually runs the other way). Commodities, as you rightly point out, are.

    3. The fact that my rough and ready index shows relative valuations haven't changed all that much says I'm on to something. Regardless of short term moves, all four currencies (with the possible exception of the MXN), tend to trade in a tight range with each other. In fact, daily volatility of MYRAUD is so tight it looks like a pegged exchange rate, even if the level floats. Volatility is orders of magnitude smaller than SGDMYR or USDMYR, despite no formal arrangement between Malaysia and Australia.

    The real point I'm trying to make here is that, regardless of our differences, the FX markets treat us the same.