Bank Negara Malaysia’s international reserves reverted to an uptrend after three straight months of decline, increasing by USD1.5b or 1.3% MoM to a three-month high of USD112.9b as of 31 July 2023 this was sufficient to finance 5.1 months of imports of goods and services (previously retained imports) and is 1.1 time total short-term external debt.
Kenanga notes that this was primarily due to a sharp increase in foreign currency reserves. Foreign currency reserves rebounded to above the USD100.0b mark due to an increase in the repatriation of export proceeds and a higher USD-converted value of other currency based assets. Meanwhile, special drawing rights, other reserve assets, gold, and IMF reserve position remained fairly unchanged. In ringgit terms, the value of BNM reserves hit another record high of RM529.3b (+RM7.2b or 1.4% MoM). USDMYR monthly average (4.591; June: 4.630): despite the recent 25 basis points (bps) rate hike by the Fed, the ringgit managed to recoup some of its losses. This was attributed to Fed chair Powell’s dovish remarks during the post-FOMC press conference, along with the increasing market expectations of a potential policy shift amid the unexpected downside reading in the US core CPI for June. Nevertheless, the local note was pressured due to the widening negative yield differential between the MY-US 10-year government bonds. Additionally, a weaker yuan resulting from China’s lacklustre macroeconomic data further added to the strain on the ringgit.
The house expects BNM to retain the status quo throughout 2024 amid easing price pressure, however, uncertainty remains. Given the persistent downward trajectory of both headline and core inflation, the BNM is expected to maintain the overnight policy rate at 3.00% for the next 6 to 12 months. However, looking ahead, the possibility of price shifts in food and commodities due to the uncertainty surrounding government policies, geopolitical risks, and weather conditions could significantly impact the inflation outlook. Therefore, it is likely that the BNM will continue to adopt a data-dependent approach in its decision-making process.
USDMYR year-end forecast: while the ringgit’s recent appreciation towards the 4.50/USD threshold was short-lived and it is currently hovering within the range of 4.54 – 4.57, Kenanga upheld its neutral-to-bullish-stance-on the trajectory of the local note in the next three to six months due to a weak USD outlook. The DXY is expected to trend lower around the 95.0 level in 4Q23 as the Fed is expected to turn more dovish amid continued disinflationary dynamics and the potential weakening of labour market conditions in the US.
