21 July 2005

Ringgit moves to managed float

As of about an hour ago, BNM has announced that the Ringgit is being unpegged from USD1 to RM3.8 & moving to a managed float regime. This follows China's decision to float the Yuan against a basket of currencies.

What is the likely impact of this move?
The RM is widely believed to be undervalued. The Economist's Big Mac Index & Starbucks Index estimates that RM is undervalued by between 25% to 55% against USD. However, its unlikely that the Ringgit will appreciate by that extent against the USD, even in the medium term.

So the best guess is that the Ringgit should appreciate steadily against all major (i.e. USD, Yen, Euro) & regional currencies as it has been dragged down, especially in recent months, by the steady depreciation of the USD. However appreciation will occur at a modest rate, as BNM will be keen to maintain exchange rate stability.

An appreciating Ringgit will be good for Malaysians with payments overseas (e.g. overseas students & companies with foreign currency denominated debts) & for consumers as there will be decreased pressure on prices, especially for imported goods. Don't expect prices to decrease (refer to the phenomenon of sticky prices). The next time your local mamak makan place cites diesel price hikes for increasing the price of your teh tarik, reply that the price of his imported sugar may have declined. Then, get up & go to another mamak who hasn't hiked his prices.

It will be bad for exporters who will see their products become less competitive overseas & get less RM for every Dollar/Euro etc. of goods sold, & for those Malaysians with assets denominated in foreign currencies (e.g. if someone owns an apartment in Melbourne) as the value of these assets will decline in RM terms.

As of 2230, FXstreet.com says that the RM appreciated against the USD.

If any of this doesn't make sense, you should've been paying attention to the teacher during those Asas Ekonomi classes.

Disclaimer: This ape shall not be responsible for any financial losses arising from actions taken on the basis of the above message.
This is not professional advice. You would be gullible to believe anything you read on a blog & silly in the extreme indeed to think even for a moment, that any legal action of that nature would be viewed with anything but utter contempt in a court of law.


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