KUALA LUMPUR (Jan 22): AmBank Group Research said it expects US Dollar / ringgit (USD/MYR) which appreciated by 8.6% in 2017 after depreciating by 4.5% in 2016 to remain strong in 2018, supported by macro fundamentals and lower risk aversion.
In a Thematic Strategy report today, AmBank group chief economist and head of research Anthony Dass said the USD/MYR ended 2017 at 4.046 with the full-year average at 4.30, hitting close to his year end projection of 4.05 and full-year average forecast at 4.31.
He said for 2018, his ‘base case’ USD/MYR end period fair is 3.90 with the full-year average at 3.93 – 3.95, while our ‘optimistic’ end period fair value is 3.76 with the full-year average at 3.80 – 3.82 supported by strong fundamentals.
“We examined the impact of USD/MYR on the respective MGS papers i.e. 3-, 5- and 10-year yields and found a significant short run and long run impact of 0.04%, 0.02% and 0.05% in the short run and +0.29%, +0.48% and +0.22% respectively in the long run for the 3-,5- and 10-year MGS yields.
“Extending our analysis to investigate the impact of USD/MYR movement on the performance of KLCI, we found a significant positive impact from a stronger USD/MYR in both the short run and long run by +0.28% and +0.71% gain for a 1% appreciation in the USD/MYR,” he said.
Dass said a strong USD/MYR on manufacturing sector suggests a positive coefficient of 1.66% for every 1% change in the USD/MYR which is felt after a one quarter lag.
He said while a stronger USD/MYR is likely to pose challenges to the competitive edge of export-oriented industries in the global market, its impact is muted if domestic manufacturers import raw and processed materials used to produce intermediate goods and exported for further processing or final consumption.
“Close co-movements between exports and imports allow for natural hedge and reduce the impact of MYR’s movements,” he said.
Dass said the construction should benefit from a stronger USD/MYR given that its activities are broadly domestic-oriented with its output priced and consumed locally, though some of the inputs are imported.
“Our findings unveil that for every 1% change in the USD/MYR, it will influence the sector by 0.65% after one quarter lag.
“As for the services sector, businesses in this industry with high import contents and limited reliance on exports will benefit from USD/MYR appreciation.
“Our analysis shows for every 1% change in the USD/MYR, it will influence the sector by 0.47% after one quarter lag. Impact on the equities stocks remain mixed,” he said.