System of Foreign Exchange in Malaysia

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Introduction

This study is to inspect the effect of reserve assets ( gold, Bank Negara Malaysia external reserve, and foreign exchange), Malaysia’s lending rate, and the U.S. trade-weighted value of the U.S. dollar against major currencies on the exchange price movement in Malaysia. This part of the section will be discussing the background of the study, problem statement, research questions, research objectives, scope of the study, the significance of the study, limitations of the study, definition of terms, and also provide an overall summary of this part of the section. The content of the research or the report consists introduction, literature review, research methodology, findings and analysis, and also a conclusion and recommendation.

Foreign exchange is the system of converting and transferring one country’s currencies into another and vice versa. When it comes to the foreign exchange market, is a place where a trade or transaction were made and takes place day to day by buying and selling currencies. The market is open 24 hours a day and five days a week. Regarding market liquidity, the foreign exchange market is an active market where price quotes change constantly and resulting in high liquidity in exchanges. The currency exchange is conducted electronically via the over-the-counter (OTX), which in all transactions that are being traded will go through computer networks between traders across the gloves with no centralized exchange. The functions of the foreign exchange market also include the provision of hedging facilities, the provision of credit, and the transfer of purchasing power.

Furthermore, exchange rates will give a real impact on the return of an investor’s portfolio. Meaning that they will use technical and fundamental analysis in their trading strategies to determine the signals and the indicators. Fundamental analysis was brought to ббmean that foreign exchange traders will use economic data to gain ideas of the currency’s true value or intrinsic value whether it is undervalued or overvalued. But if we look into technical analysis, foreign exchange traders will use technical tools such as charts, trends, and indicators for their trading strategies and historical price actions in order to predict future price action and the signals to enter and exit the market.

Besides that, foreign exchange can be traded in three different ways which are in the spot market, forward market, and futures market. Spot market or in other terms, cash market which is a public financial market that is in its financial instrument or commodities are traded for immediate delivery. In a future market in which delivery is due at a later date but settlement is made on the contract date as compared to the spot market in which instruments are traded on an immediate basis. The future market is a customized contract and a forward market is a standardized contract. There are two ways to quote a currency pair either it is direct or indirect. When it comes to trading currency, there will be a bid price and an asking price for the currency. In which the bid price is the amount that the market will buy the quoted currency in relation to the base currency or the other currencies that will be traded. When it comes to the asking price, it is the amount that the market will sell which one unit of the base currency is in relation to the quoted currency. Usually, the bid price is always smaller than the asking price and cannot be another way around.

Background of the study

The competitive environment in today’s business world makes the search for attractive market opportunities more widespread than ever before. However, unexpectedly the number of US firms that even consider investigating, foreign markets is today, as in the past, low. The US Department of Commerce estimates that there are more than 18,000 US companies that have the potential to export, but do not (Woodward & Dickerson, 1986).

Malaysia was one of those Asian crisis countries that suffered from destabilization in the capital market due to insignificant foreign exchange trading in the late 1990s. The traditional measures that are taken up to stabilize the capital inflows during any financial crisis are raising interest rates and devaluation of the currencies. But this strategy did not work in the late 1990s in Malaysia and this led to thin foreign exchange trading in Malaysia. The volatility transmission and time-varying volatility are some of the factors that affect the foreign exchange market of Malaysia. The exchange rate of the Malaysian Ringgit is always changing following a slight change in the money value of the Ringgit and other currencies of the world.

For two decades, Malaysia, Indonesia, Thailand, and Singapore assign importance to exchange rate stability in their policy-making they are also the majority of the South East Asian country (Chong Lee & Tan Hui Boon). The foreign market has enrolled retail currency traders from all over the world because of its benefits. One of the benefits or one of the main factors of trading currencies is its massive trading volume, which covers the largest asset class in the world. This means that currency traders are provided with high liquidity. The foreign exchange market is open 24 Hours a Day, 5 Days a Week, if one major foreign exchange market close, another market in a different part of the world opens for business. While on the other hand, foreign exchange is not like the stock market, the foreign exchange market operates 24 hours daily except on weekends. Foreign exchange traders find this as one of the most compelling reasons to choose a foreign exchange since it provides convenient opportunities for those who are in school or work during regular work days and hours.

Bank Negara said there were encouraging signs of improvement in the balance of demand and supply of foreign currency that is more efficient in the foreign exchange market. In 2017 as reported in The Star online the improvement in liquidation in the foreign exchange market, the average US Dollar to MYR Ringgit bid-ask spread recorded a lower average of 24 points which related to a spreading of 46 points in 2016. Moreover, pricing in the onshore market is driven by real sector activities rather than speculative transactions which primarily comprised real sector trade flow which is more than 50 percent of the total volumes.

According to Bank Negara Malaysia money changing industry in Malaysia has grown significantly in the last decade. The industry had evolving over the years and it has developed gradually as reflected in the increased total turnover of exchange transactions. Bank Negara Malaysia recorded that as of the end of August 2011, the total turnover of the 4 industries stood at RM 17.7 billion which is an increase of 49 percent from 2005. In addition, there are over 800 licensees operating at more than 1,000 premises.

In fact, specific legislation to regulate the money-changing industry is the Money Changing Act 1998 which was enacted in March 1998. Based on the procedure, licensed money chargers must be provided by the retailer money changing services which Bank Negara Malaysia also regulates currency wholesalers. In addition, the main objective of regulation is to promote the protection of consumers through reliable, transparent, and professional conduct in the provision of money-changing services. Furthermore, to prevent the industry from being used as a conduit for money laundering and terrorist financing.

The money changing has initiated a review of the legal and regulatory framework by Bank Negara Malaysia in 2009 with the objective of modernizing the industry landscape and strengthening safeguards to protect the integrity of the industry. Moreover, it’s own a result that greater business flexibilities and opportunities including the ability to carry on multiple business activities within a single entity for qualified entities also promote greater synergies between the activities and economies of scale. Furthermore, the differentiation of regulations is required according to the nature, scale, and complexity of an entity’s business.

Problem Statement

According to (Ramasamy & Abar, 2015) influence the of exchange rate fluctuation is defined as the risk associated with unpredicted movements in the exchange rate. Macroeconomic variables such as interest rate, inflation rate, the balance of payments, tax rate, etc. The majority of the currency dropped against US Dollar in the global market. Therefore, investors were caught off by the near-complete absence of volatility in exchange rate movements.

The main problem in this research is about the volatility of exchange rate movements will impact the foreign exchange in Malaysia. In this study, the selected factors of exchange rate will be analyzed to provide a deeper understanding of the movement in Malaysia. However, there were still a few new currency investors who did not understand the basics behind currency movements. Investors or traders who are new to the currency markets need to understand the risks in order to be able to participate in the market. Only then can start trading currencies and apply many different strategies.

Factors affecting the exchange rate can be economic, political, psychological, and so on. Exchange rate behavior may be studied through macroeconomics variables or microeconomics variables. Policymakers would like to know what can be done to limit the fluctuation in the currency’s values and the forces behind it. There is still confusion in deciding the factors of the 5 exchange rate. Thus, to find the answers to these issues research is needed with the goal of explaining the exchange rate behavior.

Main Research Question

What are the factors that affect the movement of the exchange rate in Malaysia?

Specific Research Questions

Does the variability of US-Trade weighted assets affect the exchange rate volatility in Malaysia?
Does the variability of Malaysian reserve assets affect the exchange rate volatility in Malaysia?
Does the variability of Malaysian lending interest rate affected the exchange rate volatility in Malaysia?

Research Objectives

The objective has been developed from the research problem and research question. The research objective also could be listed as fewer than two which are the main research objectives and specific research objectives.

1.5.1 Main Research Objective

The main objective is to determine the factors affecting movement in the exchange rate volatility of Malaysia which is MYR against USD. The United States is taken as the base country against Ringgit Malaysia.

Specific Research Objectives

To investigate whether US trade-weighted asset affects the exchange rate volatility in Malaysia.
To investigate whether Malaysian reserved assets affect the exchange rate volatility in Malaysia.
To investigate whether the Malaysian lending interest rate affects the exchange rate volatility in Malaysia.

1.6 Scope of the Study

The variables that can give a big impact on the exchange rate of Malaysia ringgit to the US Dollar are the Malaysian lending interest rate, the US trade-weighted value of our dollar against major currencies, and Malaysian reserve assets as independent variables. The field of reference in this research paper is the period of twelve years. The data had been collected monthly starting from 2006 until 2018 got 144 samples of data had been used to regress. The study is conducted on the relationship between each of the independent variables towards the foreign exchange rate volatility.

1.7 Significance of the Study

The most rural issue that must be highlighted in this research paper is it must be related to the country’s policy, government, and foreign also national peoples. The intention of the investigation of this issue is to prove the volatility of foreign exchange rates whether can be affected by each of the independent variables. Moreover, there must be a limitation in seeking specific input about this issue one of which is the effectiveness of the exchange rate between one country to another country where the currency give a big influence on it. Then, after identifying the evidence of the issue there must be another variable that can be used as an independent variable which refers to macroeconomics such as lending interest rate and reserved assets. The final point of the issue is the US trade-weighted value of the US Dollar against major currencies where uncertainty results will occur because the US monopolizes the world economy.

1.8 Limitation of Study

In order to conduct good research and also this research needs to have an ongoing process including chapter 1, chapter 2, and so on, of course, there will be some limitations and barriers that will exist in order to complete this process and make a complete. Some limitations and barriers will be incurred in order to complete this research can be seen as follows:

1.8.1 Data Accuracy

To get good results in this research, the accuracy of the information or data is important. Not all the data available is free. It may need some payment for the information. It can be gathered from journals, annual reports, and the internet. Data and information are important keys when doing research. However, the data that is being gathered and collected may not be accurate with the scope of the study. This may due to a technical error during the data collection process.

1.8.2 Data constraint

Research can only be carried out if data is available. Using secondary data as the data collection method, the researcher has the limitation to search for the data. Some of the data can be found in the data stream and another potential source of data, but some of it cannot be found. The data can only be accessed in UiTM by using Reuters Thompson. When the researcher is able to search the data, another problem that occurs is the data is not sufficient for the number of observations.

1.9 Definition Key Terms

In this part, this research paper will explain all the dependent and independent variables that have been used.

1.9.1 Foreign Exchange Volatility

It is also known as currency volatility, this refers to the amount of uncertainty involved with the size changes in the currency. It is the unpredictable movement of exchange rates in the global foreign exchange market.

1.9.2 US-Trade Weighted Value of US Dollar against Major Currencies

The US-trade-weighted dollar is a measure of the US dollar’s foreign exchange value compared to certain foreign currencies. In comparing the value of the US dollar to all foreign 8 currencies, trade-weighted dollars give importance or weight to currencies most widely used in international trade.

1.9.3 Reserved Asset

A reserve asset is an asset that monetary authorities can easily use for a number of purposes. In order to reconsider a reserve asset, it must be an external physical asset, controlled in part by policymakers. The asset should be transferable easily.

1.9.4 Lending Interest rate

Interest rate is the amount charged by a lender to a borrower for the use of assets, expressed as a percentage of the principal. Interest rates are typically noted on an annual basis, known as the annual percentage rate (APR).

1.10 Summary

Foreign exchange is the most precious in the money market because it shows the volatility of each country. Variables such as Malaysian lending interest rate, US-Trade weighted, and Malaysian reserved assets are the determinants of the exchange rate in Malaysia. The researcher has highlighted how this variable would affect the volatility and thus it helped the researcher to have a clear understanding in depth of Foreign exchange towards the country. On the other hand, the researcher also came up with a problem statement on how the volatility of exchange rate movements will impact on the foreign exchange in Malaysia. The foreign market should provide many opportunities for investors. However, there were still a few new currency investors who did not understand the basics behind currency movements. Therefore, by using all the data and information provided this research paper will answer the objective and research questions of this study.

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