Foreign exchange is a series of interconnected webs that has several factors affecting it. Four of the main factors were mentioned in the Forex calendar released by the Central Bank of Malaysia, Bank Negara.
Producer price index (PPI) is one factor that plays an important role in the currency market. These are set of indexes that quantify the mean value of changes in selling prices procured by producers of commodities and services in the function of time. In the Malaysia’s economic calendar, the data of the latest producer price change was released in the last week of October showing the earlier price changes up until the month of September. Prices increase by 0.4 percent compared to that of the previous months with -4.8 percent in February 2016 considered as lowest rate of change in this year. The increase in price changes was due to the rise of cost of certain commodities in the categories of forestry, fishing, and agriculture, the supply of water, gas, and electricity. With the use of worldwide macro models and expectations of analysts, an increase in the rate of price change is expected in the following months.
Money supply is the total currency stock and other aspects circulating state’s economy in the function of time, thus, greatly affecting foreign exchange. The means of measuring money supply is by means of metric units such as M0, M1, M2, and M3. M0 and M1 or “narrow money” comprises of notes and coins present in the cycle that can easily be converted to cash. M2 is the inclusion of M1 along with short-term deposits in banking firms. M3 consist of long-term deposits added with M2. By the end of October, the Central Bank of Malaysia released the year over year M3 money supply for the month of September 2016. From the past years up until the present, there is an increasing fluctuation of M3 supply. Malaysia reached its highest 1617459 MYR million in the month of September 2016 and is expected to increase up to 1688510 MYR million 4 years from now.
Inflation rate also has an impact to forex. Inflation rate and producer price index are similar since both are measures of the increase in the prices of commodities in the economy over a certain period of time. November 25, 2016, Bank Negara, released the inflation rate for the month of October 2016 with 1.4 percent. The highest percentage in the year 2016 reached 4.2 percent in the month of February 2016 which is very low compared to the highest level with a 23.9 in 1974. In the long run, it is expected that the inflation rate of Malaysia will trend about 3.50 percent in the year 2020 based solely on their econometric models.
The interest rate is the additional amount paid by the borrower to the lender besides the money borrowed. The decision on what will be the Interest rate in a particular month greatly affects forex. As of November 23, 2016, Bank Negara officially announced that the inflation rate will remain at 3% and will have a steady value in 12 months. It is expected that the interest rate of Malaysia will increase to 3.50 percent by 2020.