In spite of impending yield increase, the recent ‘debasement’ (or correction) of USD continues to puzzle. Common sense seems to suggest that a higher yield should result in a higher USD. Since mid 2017, there is a divergence between USD yield and DXY (US Dollar index). Should rate increase lead to a higher USD?

DXY vs US10Y (ts)

Regression – DXY vs 10Y US Government Bond Yield

Although the r-squared is low at 13% (lack of statistical significance?), there appears to be a negative relationship between DXY and US10Y in respect of the period of 2010 till 2018. Based on current US10Y yield of 2.6465%, the predicted DXY is approximately $85.018 (potentially mean more room for further decline in USD?)

 

Reg 1.png

What does this mean for the Ringgit?

As DXY declines, the Ringgit will appreciate:

DXY vs MYR (ts).png

Based on current regression analysis, the Ringgit has potential room to appreciate further (predicted: $3.67 vs actual: $3.90)

USDMYR DXY relationship.png

DXY vs MYR (forecast).png

In addition, MYR is also supported by today’s rate hike:

News Update: Bank Negara Malaysia (BNM) raised the Overnight Policy Rate (OPR) by 25 basis points to 3.25% from 3% at its Monetary Policy Committee (MPC) meeting today. This is the first rate hike since July 10, 2014. 

 

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