The notion of intermarket relationships is nothing new, as there remain inextricable links between various sectors within the financial marketplace. Take the relationship between stocks and commodities, for example, which is usually defined by an inverse correlation that sees one asset rise while the other declines in value.
The same principle cannot be applied in advanced industrial economies, however, as these nations are largely commodity-based and reliant on natural resources for their growth. In the case of Malaysia, for example, crude oil remains a prominent export and a lucrative commodity, and in this instance the value of stocks is likely to progress along a similar trajectory to commodities.
Exploring the Relationship Between the Malaysian Ringgit and the Price of Crude Oil
In the case of Malaysia, crude oil’s influence also extends beyond the value of stocks and shares. It also has a direct impact on the nation’s currency, thanks primarily to the reliance that the Malaysian economy has on contributions from the national oil and gas industry.
In fact, oil (and other mineral fuels) is part of the second largest export group in Malaysia, with a value of $26.5 billion and a 14% share of the overall market. This means that when the price of oil falls, the value of its contribution to the national economy also declines, causing revenues and reinvestment levels to tumble as a result. The weakening of the economy subsequently causes the sustained devaluation of the Malaysian Ringgit (MYR), impacting everything from the country’s base interest rate to inflation.
This became apparent during the decline of the crude oil market at the end of 2014, when the issue of oversupply swamped demand and caused prices to fall (a problem that has only recently been even partially resolved). This eventually saw crude prices fall to a six-year low of $45.13 per barrel in January 2015, following seven consecutive months of decline. During the same quarter, the MYR also plunged to a six-year low of 3.634 against the U.S. Dollar (USD), mirroring the trajectory of crude oil prices in real-time.
The Bottom Line
Conversely, the fortunes of the MYR have reversed in line with crude oil prices since the beginning of 2017, as OPEC’s production caps continue to drive incremental hikes. More specifically, the MYR has rebounded on the back of a higher crude oil price, currently trading approximately 0.5% above its 200-period moving average. This highlights the direct correlation between crude oil prices and the Malaysian currency, with the former dictating the performance of the latter and driving clearly visible trends in growth and depreciation.
Beyond this, rising crude oil prices also boost the Malaysian economy’s growth and trigger an increase in investor sentiment. This means that brokerage sites like LCG see a higher demand for Malaysian stocks and commodities, with even overseas investors looking to commit money in the region. This strengthens the MYR even further, although it must always be remembered that Malaysia’s currency will always rely heavily on the price of crude oil without further economic diversification.
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