After exhibiting an easing trend for four consecutive months, inflation rose in August to 3.7% y/y while the core inflation rose at a slower pace by 2.4% y/y. The strong inflation in August was partly due to higher petrol prices. This explains the 3.4% y/y gain in non-food prices in August versus 2.7% y/y in July.

Meanwhile, the ringgit (MYR) gained 0.14% to 4.1875 against the USD despite higher inflation data. We believe this could be due to: (1) evidence of demand-pull inflation kicking in reflected by the steady gain in prices related to household items; (2) expectations of the domestic GDP to perform better in 2017, with our projection at 5.7% – 5.9%; (3) external reserves sitting slightly above US$100bil; (4) inflation averaging around 3.5% – 3.7% for the full year, suggesting the 2H inflation would be lower than the 4.1% average in 1H2017; and (5) policy rate likely to stay at 3.00% in 2017 with a 45% chance for a rate hike.

On an immediate note, we expect the MYR to trade within a range of +/- 0.05 against the USD. We believe the momentum for MYR to reach 4.10-4.12 against the USD by end-2017 remains high. Our MYR projection against the USD is poised to average around 4.31 – 4.33 for the full year of 2017. In our assessment, the current fair value for MYR is 3.95 against the USD based on time series modelling and REER.

• After exhibiting an easing trend for four consecutive months, inflation picked up in August. Headline inflation rose 3.7% y/y in August from 3.2% y/y in July. Meanwhile, core inflation rose at a slower pace by 2.4% y/y in August against 2.6% y/y in July.

• The strong inflation in August was partly due to higher petrol prices. The average price of RON95 and RON97 per litre was RM2.12 and RM2.39 respectively in August versus RM1.75 and RM2.10 respectively a year ago. Fuels & lubricants for personal transport equipment accounted for 7.8% of the CPI weights. This explains the 3.4% y/y gain in non-food prices in August versus 2.7% y/y in July.

• Meanwhile, the ringgit (MYR) gained 0.14% to 4.1875 for the day against the USD despite higher inflation data. It could probably be due to evidence of demand-pull inflation kicking in. We noticed prices of household items exhibited steady gains such as food and non-alcoholic beverages (+4.3%), restaurants and hotels (+2.8%), health (+2.7%), furnishings, household equipment and routine household maintenance (+2.7%).

• On an immediate note, we expect the MYR to trade within a range of +/- 0.05% against the USD, with more on a strengthening mode. We expect the MYR’s momentum to reach 4.10 – 4.12 against the USD by end-2017. MYR sentiments will be supported by: (1) better-than-expected GDP in 2017, with our projection at 5.7% – 5.9%; (2) strong external reserves sitting slightly above US$100bil; (3) inflation averaging around 3.5% – 3.7% for the full year, suggesting the 2H inflation would be lower than the 4.1% average in 1H2017; and (4) policy rate likely to stay at 3.00% in 2017 with a 45% chance for a rate hike.

• Our MYR projection against the USD is poised to average around 4.31 – 4.33 for the full year of 2017. In our assessment, the fair value for MYR is currently at 3.95 against the USD based on time series and REER assessment.

Source: AmInvest Research - 21 Sept 2017