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Crude Oil Price and Exchange Rates - The Case of Malaysia and Brunei

Author

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  • Abdul Razak Abdul Hadi
  • Hafezali Iqbal Hussain
  • Zalina Zainudin
  • Raja Rehan

Abstract

This study is driven by the motivation to investigate the impacts crude oil price fluctuations on Malaysian and Brunei exchange rates as proxied by RM/USD and BD/USD respectively. Even though there is no specific economic theories that can help explain the interaction between commodity and foreign exchange markets, the study is research-worthy as both Malaysia and Brunei are major oil-exporting countries in South East Asia. This study is considered quite extensive involving 370 data points spanning from January 1988 till October 2018. Using Engle-Granger 2-Step Cointegration Test (1987) as an estimation tool, the empirical results show the presence of long-term equilibrium relationship between the two national currencies and crude oil price. Interestingly, there is also a significant short-run causality between them in both countries. With respect to the short-run dynamics, there is a unidirectional causality running from crude oil price to the two exchange rates. The study also posits that RM is less prone to changes in crude oil price during the period before Asian Debt Crisis in 1997. After the removal of RM peg in June 2005, RM is found to be more sensitive towards changes in crude oil price over short haul. In summary, the significant equilibrium and dynamic relationships between the national currencies and crude oil price are therefore confirmed and perhaps the quotation of crude oil price in USD could be one of the explanations.

Suggested Citation

  • Abdul Razak Abdul Hadi & Hafezali Iqbal Hussain & Zalina Zainudin & Raja Rehan, 2019. "Crude Oil Price and Exchange Rates - The Case of Malaysia and Brunei," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 10(5), pages 1-10, August.
    • Handle: RePEc:jfr:ijfr11:v:10:y:2019:i:5:p:1-10
    DOI: 10.5430/ijfr.v10n5p1
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    References listed on IDEAS

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    1. Abul Hassan, 2009. "Risk management practices of Islamic banks of Brunei Darussalam," Journal of Risk Finance, Emerald Group Publishing, vol. 10(1), pages 23-37, January.
    2. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
    3. Granger, C. W. J., 1981. "Some properties of time series data and their use in econometric model specification," Journal of Econometrics, Elsevier, vol. 16(1), pages 121-130, May.
    4. Maurizio Michael Habib & Sascha Bützer & Livio Stracca, 2016. "Global Exchange Rate Configurations: Do Oil Shocks Matter?," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 64(3), pages 443-470, August.
    5. Engle, Robert F. & Yoo, Byung Sam, 1987. "Forecasting and testing in co-integrated systems," Journal of Econometrics, Elsevier, vol. 35(1), pages 143-159, May.
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    Cited by:

    1. Taufeeque Ahmad Siddiqui & Haseen Ahmed & Mohammad Naushad & Uzma Khan, 2023. "The Relationship between Oil Prices and Exchange Rate: A Systematic Literature Review," International Journal of Energy Economics and Policy, Econjournals, vol. 13(3), pages 566-578, May.
    2. Erlane K. Ghani & Qazi Muhammad Adnan Hye & Raja Rehan & Sultan Salahuddin, 2023. "Examining Capital Structure Determinants for ASEAN Energy Firms," International Journal of Energy Economics and Policy, Econjournals, vol. 13(3), pages 129-140, May.
    3. Liu, Zhen & Tang, Yuk Ming & Chau, Ka Yin & Chien, Fengsheng & Iqbal, Wasim & Sadiq, Muhammad, 2021. "Incorporating strategic petroleum reserve and welfare losses: A way forward for the policy development of crude oil resources in South Asia," Resources Policy, Elsevier, vol. 74(C).

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