● Bank Negara Malaysia (BNM) international reserves reverted to a downtrend, declining by USD1.1b or 0.9% to USD114.4b as of 28 April 2023

− Sufficient to finance 5.1 months of imports of goods and services (previously retained imports) and is 1.0 time total short-term external debt.

● The decline was mainly due to a sharp drop in foreign currency reserves

− Foreign currency reserves (-USD1.2b or -1.1% MoM to USD101.9b): decreased at the fastest pace in seven months, potentially due to the BNM foreign exchange intervention operations.

− Other reserve assets (+USD0.1b or +4.0% MoM to USD2.8b): largest holdings in 14 months.

− While gold and special drawing rights remained fairly unchanged.

● In ringgit terms, the value of BNM reserves decline by -RM4.9b or -1.0% MoM to RM505.0b

− USDMYR monthly average (4.424; Mar: 4.469): despite the narrowing of the MY-US bond yield differential amid expectation of another 25 bps hike by the Fed and rising global recessionary fears, the ringgit reversed some of its March’s losses against the USD. The local note was mainly supported by the weakening of the USD index (DXY) due to the softening of US labour market, as well as China's stronger-than-expected 1Q23 GDP reading.

− Regional currencies: most ASEAN-5 currencies strengthened against the greenback, mainly due to a 1.9% decline in the DXY. The appreciation was led by IDR (2.7%), followed by MYR (1.0%), SGD (0.7%), and THB (0.6%). Bucking the trend, PHP depreciated by 1.2% against the USD, mainly due to Bangko Sentral ng Pilipinas’ dovish guidance and higher Brent crude oil price average of USD83.4/barrel in April (Mar: USD79.2/barrel).

● No more hikes expected in 2023 as the already implemented rate increases should suffice in reducing inflation

− To recap, at its January 2023 meeting, the BNM decided to keep the overnight policy rate (OPR) unchanged "...to assess the impact of the cumulative past OPR adjustments, given the lag effect of monetary policy on the economy." The most significant data since then has been the March core inflation reading, indicating a decrease in inflation to 3.8% YoY from the November 2022 peak of 4.2%. Hence, despite the recent unexpected 25 basis points rate hike by the BNM, we maintain our primary assumption that the implemented rate hikes should suffice in further reducing inflation while sustaining economic growth. Assuming no external shock to our growth and inflation outlook, we expect the BNM to maintain a steady OPR rate of 3.00% for the rest of 2023.

− USDMYR year-end forecast (4.11; 2022: 4.40): despite still trading above the 4.40 level against the USD, the ringgit may gain ground and strengthen to around 4.35 by end-2Q23, especially if the Fed signal that they have done enough in their next meeting in June. Moving forward, the local note may continue to appreciate due to solid domestic economic growth outlook and a risk-on sentiment comeback, potentially in 4Q23 as the Fed begins to cut rates.

Source: Kenanga Research - 10 May 2023