The Malaysian ringgit (MYR) has been performing well in 2017, appreciating by 6.3% against the USD year to date (YTD). Yet the local currency is trading below the parity line of the real effective exchange rate (REER) since December 2014, suggesting it is in the undervalued region. We also found currencies like the rupiah to be undervalued since October 2011, while the other undervalued currencies are the yen (October 2012 onwards), Aussie dollar (October 2014 onwards) and euro (May 2014 onwards).

Underpinned by undervalued currencies, we believe there is room for the MYR to appreciate further against the USD, supported by macro fundamentals such as the healthy level of reserves, net inflow into equities, improving foreign shareholdings in the MGS, easing of foreign currency deposits, stable growth and prudent monetary policy. We project the USD/MYR to average around 4.33 with our year-end target of 4.15-18 for 2017. At our projected levels, the USD/MYR is expected to trade at a discount from our fair value of 3.9572 based on fundamental analysis and 3.76 using the REER principle.

We expect the USD/MYR to strengthen in 2018, averaging around 4.2499 with the year-end target at 3.9500. With a firming USD/MYR outlook, export-led industries that are competitive in the global market should experience challenges. The impact on the industries will depend much on whether the drop in their exports proceeds can be mitigated with cheaper costs of imported inputs due to the stronger MYR. The ability to do so would mean that these industries will benefit from the natural hedge. But it may not be the case for export-dependent industries that are price-takers in the global markets sourcing their inputs locally and pay in local currency. Such industries risk facing strong margin pressures. If the firms source their inputs from abroad and supply the final product locally, they will gain from a strong MYR.

While an MYR appreciation could result in some firms facing a decline in profitability, it opens up other opportunities. Those adversely affected would undertake steps to hedge their foreign currency exposure and may need to re-strategize or even venture into other opportunities. Since, exchange rate movements are transitory in nature, those benefiting should not be complacent and should improve their operations to cope with the more challenging times when the situation reverses.

Source: AmInvest Research - 17 Oct 2017