The Influence of Non-Parity Factors on the Exchange Rate of Malaysia against Six Major Trading Partners

Abstract

This study examined the influence of non-parity factors such as Crude Oil Price, Crude Palm Oil Price, Current Account Balance, Liquidity, Trade Openness, Fiscal Balance, Sovereign Debt, and International Reserves on the Malaysian exchange rate. The effect of non-parity factors on the exchange rate of six major trading partners were investigated using the panel regression model. This analysis used data spread throughout 10 years starting from January 2006 to December 2016. The result shows that the MYR exchange rate was positively impacted by current account balance, trade openness, and sovereign debt and negatively impacted by crude oil price. Based on these findings, policymakers must pay attention to designing favourable trade policies that invite these trade partners to increase trade relations with Malaysia, especially in the domain of Malaysia’s goods and services exports. Meanwhile, policymakers should also emphasise on reducing foreign debt by imposing tighter regulations to control government spending.