July rout. Malaysia’s foreign reserves fell by US$3.7b to US$96.7b (RM364.7b) as at end-July following a fall of US$5.0b to US$100.5b (RM379.4b) at mid-July. This brings about a total reduction in the stock of reserves to about US$8.7b or RM33.5b, the highest single month loss since Sep/Oct 2008, at the height of the Global Financial Crisis. The current reserves level is sufficient to finance 7.6 months of retained imports and is 1.1 times the redefined short term external debt.

Intervention eased. The smaller decline in reserves in the second half of July compared to the first half may have reflected some degree of easing of BNM’s forex intervention. Nevertheless, for the whole of July, the central bank was seen as very aggressive in defending the ringgit which stubbornly remained defensive at around 3.80 to the US dollar in spite of large outflow of capital. This is reflected in the large net foreign equity decline of about RM2.8b in July following RM3.2b drop in June which is by far the highest monthly net outflow this year.

3.80-level punctured. Much can be expected as to how far BNM would go to defend the ringgit and where the currency is heading after it breached the 3.80 level on July 6. Judging by the level of the ringgit against the dollar at the time of the release of BNM bi-monthly reserves data which was at 3.92 (Jul 7), we expect that the level of reserves would deplete further in August. Since the beginning of August the ringgit has depreciated by about 2.8% against the US dollar.

Freefall. From a technical perspective the next psychological-important level for USDMYR would be at 4.00. This would entail that BNM would continue to intervene by selling its forex reserves to hold up the value of the ringgit. The ringgit is already the worst performing currency in the region falling by about 12.2% year-to-date against US dollar and mostly other major currencies including pound sterling and the Singapore dollar. Furthermore, we do not expect the downward pressure on the ringgit to abate anytime soon especially ahead of the highly anticipated US Fed rate hike possibly as soon as its next meeting in September (16-17th). In the meantime, the emerging market’s currencies, including the ringgit, would continue to be under selling pressure due to weakness in commodity prices and broad US dollar strength. Financial fiscal governance and political issues would likely add to the mounting pressure on the ringgit. 

Source: Kenanga Research - 10 Aug 2015