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Abstract

Currency exchange rate volatility can affect the natural rubber price because most agricultural commodities are traded in USD. The objectives of the study is to determine the impact of exchange rate volatility on both natural rubber (NR) prices of (SMR20 and RSS4); and forecast a short-term exchange rate price (ERP) of Malaysian Ringgit (RM per USD) and both NR prices strongly represented in the Asian region, Malaysian NR market. The granger causal relationship is first analyzed along the VECM model with more efficient Engle-Granger causality procedure. Both a short-term ERP and NR prices ex-ante forecasts are tested by using Pindyck and Rubinfeld’s procedures. The result shows the RSS4 price Granger-cause changes the SMR20 and ERP with unidirectional causality relationship. Both a short-term ERP and NR prices ex-ante forecasts would be on a slightly increasing trend from January to June 2016. It may be due to the government and traders in changing their behaviour by increasing domestic consumptions for the stabilization of the NR supply-demand balance.

Keywords: Exchange Rate Volatility, Forecasting, Malaysian Natural Rubber Price.

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