In a recent interview, Phil Waters, CEO of OANDA for APAC & Emerging Markets, shared valuable insights into the intricate relationship between the US Federal Reserve’s interest rate decisions and Malaysia’s economy and stock market.
Correlation between US Fed Rate and Malaysia’s Economy
According to Waters, the current 1.5-year US interest rate hiking cycle has indirectly impacted Malaysia’s economic landscape. The USD/MYR exchange rate saw a significant rally, leading to a 4.7% loss in Malaysia’s benchmark FTSE Bursa Malaysia KLCI Index. This correlation is attributed to Malaysia’s high external debt, around 60% of GDP, resulting in a higher cost of funding burden with USD appreciation.
Recent Pause in Rate Hikes: Potential Turning Point
Waters highlighted the recent pause in US Fed rate hikes and the potential for a rate cut in May 2024 as positive indicators for Malaysia. The health of China’s economy also plays a crucial role, given its status as Malaysia’s top trading partner. A weakened US dollar could offer relief to Malaysia’s economy and stock market.
Global Impact of Fed Rate Hikes
Discussing the global impact of Fed rate hikes, Waters explained that further rate increases could drive up longer-term interest rates, affecting the cost of funding for US businesses and consumers. This, in turn, dampens economic sentiment and may lead to a slowdown in consumer spending, impacting both US economic growth and corporate earnings.
Predictions and Outlook for Rate Hikes
Waters provided insights into predictions for rate hikes, suggesting that a rebound in longer-term rates might substitute for a rate hike if there is stronger economic and inflation data before December 2023. However, the odds for a 25 bps hike in December 2023 have decreased, with considerations such as a cooler-than-expected US CPI print for October and declining employment levels.
Managing Impacts: Government and Business Strategies
In response to potential impacts, Waters suggested strategies for governments and businesses, emphasising the importance of reducing US-denominated debts or liabilities and implementing measures to hedge interest rate risks.
Importance of Strong Risk Management in Inflationary Periods
Waters underscored the importance of a robust risk management strategy, especially during inflationary periods. Higher inflation can lead to elevated long-term interest rates, squeezing business profit margins. For individuals, disciplined trading and employing risk management tools are crucial to navigate volatile market conditions.
