We expect the 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. The USD/MYR ended 2017 at 4.046 with the full-year average at 4.30, hitting close to our year-end projection of 4.05 and full-year average at 4.31.

For 2018, our base case USD/MYR end-period fair value 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 the 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 on the impact of the USD/MYR movement on the performance of the 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 respectively for a 1% appreciation in the USD/MYR.

A strong USD/MYR on the 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. 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 to produce intermediate goods and then export these goods for further processing or final consumption. Close co-movements between exports and imports allow for natural hedge and reduce the impact of the MYR’s movements.

The construction sector should benefit from a stronger USD/MYR given that its activities are broadly domesticoriented 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 the 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.

Source: AmInvest Research - 24 Jan 2018