Interest Rate Parity - A Strange issue of SGDMYR

[ineedadvice101]

@troubledautisticsinner At least I stated a fact. Better than going around telling people to quit reddit because you don't like their comment.

What kind of retard does that?

 

[troubledautisticsinner]

@ineedadvice101 Throwing abusive words just because you don't like a random stranger's comments on the internet is is even retard-er

 

[singflatly]

@ineedadvice101

D appreciation is just a 'catchup' to the prolonged mismatch in the two currency's interest rate differenc

"run some math"... he literally did

 

[ineedadvice101]

@singflatly Its a screenshot of a spreadsheet. I am sure you have analyzed the screenshot and figured out the math he's doing.

Please share your findings.

 

[belove]

@taylorjr94 MAS decides the SGD rates via a peg towards a basket of currencies, hence it isn’t as affected by interest rates. They keep the basket allocations and their national reserves a top secret, which avoids speculators from betting against the SGD and adding downward pressure. The MYR on the other hand is traded freely.

 

[taylorjr94]

@belove RM is also a non-internationally traded currency. BNM actively goes out of it's way to prevent Ringgit NDFs.

https://en.wikipedia.org/wiki/Template:Most_traded_currencies

This chart shows that SGD is 12x more liquid and actively traded than RM. (2.4% vs 0.2%)

 

[denise123]

@taylorjr94 I'd be more cautious when taking data at face value - World Bank's deposit interest rate is not synonymous with the retail FD rate that you're thinking of. You have to dig deeper from IMF (Primary source being cited by World Bank) on how they actually define deposit interest rates.

There's no concrete indication that interest rate parity holds true in real world scenarios when the:

1. Movements in exchange rates are multi-variate
2. Interest rate parity requires multiple idealistic assumptions as pointed by others such as the absence of external intervention when Singapore's MAS intervenes with SGD's forex rates.

 

[taylorjr94]

@denise123 a. Totally understand that IRP is oversimplifying what is a complicated mix of things.

b. Banks' SGDMYR Forward rates are set based on IRP + spread, so I won't say it's totally divorced from reality.

c. Sometimes basic analysis is informative, and insightful. My own reading of the analysis seems to suggest SGD has been artificially weakened over a long period of time. It should be much stronger if IRP holds true. If we add in the SGD's safety premium, SGD should be worth at least 10-15% more.

 

[anonymousrain]

@taylorjr94 I think there is a lot of misconception on why the SGD is so strong.

1. First it is not strong, it is stable compared to the USD.
2. Second, They are highly intervened and controlled.
3. By not playing with the interest rate, they can do number 2 more effectively.

Its more like Hong Kong dollar rather than a free floating currency. Throw a lot of economic theory out the window on what the currency's true value should be if it is highly intervened.

The currency charts are too stable compared to the USD over the last 10 years.

Malaysia plays with its interest rate (3 pct only) so thus the currency is harder to keep stable

 

[taylorjr94]

@anonymousrain Yup. From a policy POV, MAS doesn't regulate interest rate, and instead prefers to manage inflation through currency exchange. There's also the whole impossible trinity thing that explains why they cannot do both currency and interest at the same time. Regardless of the basis, from my POV, this policy is very sensible due to how the country imports.

That said, from someone choosing where to put our savings, aka, from a personal finance POV, either in SGD or MYR or USD, it is still worthwhile to look at how the differences in interest rate affected historical returns. Given the managed nature of SGDMYR, it's likely that historical returns would continue.