The Ringgit and 1MDB

I’m still hearing people talking about the 1MDB effect on the Ringgit. Here’s what I’ve worked out:

• USDMYR is the (inverted) Ringgit exchange rate (i.e. USD denominated in MYR. I know, I should flip the nomenclature, but I’m too lazy to);
• DXY is the Federal Reserve’s Broad Nominal Trade Weighted Dollar Index (daily data from 2012 to present);
• D_WSJ is the dummy variable for the July 2 WSJ report that linked the PM with 1MDB (July 2, 2015);
• D_Edra is the dummy variable for the announcement of the sale of Edra Energy to China General Nuclear Power Generation (November 23, 2015);
• D_Trump is the dummy variable for the US Presidential Election (November 8, 2016);
• D_PBOC is the dummy variable for the August 11 2015 devaluation of the Yuan;
• The other three terms are the two dummy variables to test changes in the slope coefficients from the PBOC move and the US election, and the last term is to handle serial correlation in the data.

Here’s how to interpret this:

1. A stronger USD in general leads to a weaker Ringgit USD exchange rate (but you knew that right?);
2. News on 1mdb had a statistically significant (just barely) impact on the Ringgit, but the effect was very, very small;
3. The sale of Edra basically reversed the 1MDB effect and then some (net effect was slightly positive), but again, the effect was very, very small;
4. The PBOC devaluation had a huge impact. The sign however is positive, which I interpret to mean that it caused a general sell off in emerging market currencies (USD strengthening), which benefitted the Ringgit because it had already been sold down. The positive sign on the slope dummy however indicates that Ringgit volatility increased after the PBOC move (which is bad);
5. The Trump dummies (no pun intended) are NOT however statistically significant, at least up to the latest data I have available (last Friday, Nov 18), by which I take to mean that the selldown so far has been entirely due to USD strengthening, and not Ringgit weakness per se. Bear in mind though, that a) we’ve only had one week’s worth of data and a bit, and b) the change in the slope coefficient from the PBOC devaluation meant that Ringgit sensitivity to USD moves is already elevated relative to before August 2015.

Why no oil prices? Because the effect of oil prices basically disappears if you put both oil prices and the USD index in a single regression. Technically, we have a multi-collinearity problem, since oil prices are themselves partly determined by USD movements.

What if we want to isolate the impact of 1MDB, without the other factors? It looks a lot bigger:

However, the coefficient signs are wrong – this says the Edra sale had no impact (not statistically significant), while the WSJ report impact was positive. If you believe that, I have a bridge in London I want to sell you.

Overall, what I think is that many people are confusing the effect of PBOC policy and general USD movements on the Ringgit and reflexively blaming a 1MDB effect, regardless of the evidence. It’s also implied here that the most recent moves are largely a function of USD appreciation, and not something specific to the MYR.

Technial Notes:

Exchange rate data from the Pacific Exchange Rate Service and the Federal Reserve