Fell by US$1.4b in September. Malaysia’s foreign exchange reserves fell by US$2.0b in the 2H of September after an increase of US$0.6b in the 1H. In total, reserves fell by US$1.4b during the month of September. According to Bank Negara, the latest decline in reserves was mainly due a quarterly adjustment for foreign exchange revaluation changes. As at 30th of September, the international reserves held by Bank Negara Malaysia totalled US$93.3b, which is the lowest since August 2009. The weaker local currency meant that the ringgit equivalent of foreign reserves was however at an 11- month high of RM415.1b. The current reserves level is sufficient to finance 8.6 months of retained imports and is 1.2 times the short term external debt.

Slowing rate of decline. The pace of decline in September was not as severe as in August, when reserves fell by US$1.9b, and in July, when reserves plunged US$8.8b. This suggests that we are probably past the stage of large depletion of reserves and this is supported by BNM allowing market forces to determine the value of the ringgit.

Left to market forces. Despite the decrease in reserves in September, we believe BNM has eased off from intervening in foreign exchange markets as compared to July and early August when a sizeable chunk of reserves was apparently used to support the ringgit. Recent comments by the BNM governor are in support of a floating exchange rate and no capital controls. Tan Sri Zeti Akhtar Aziz has also assured the market that forex reserves will eventually be rebuilt as the country is running current account surpluses and continues to welcome foreign direct investment.

Ringgit will remain weak in near term. There remains a risk that the depletion of reserves could resume in the coming months as the US Federal Reserve is on a verge of making its first rate hike since 2006. Despite the rate hike being pushed back repeatedly from mid-year, we view the FOMC as almost certain to raise rates on at least one occasion this year as the credibility of its forward guidance is at stake. Meanwhile, the ringgit is to remain undervalued until as BNM puts it: “external and domestic uncertainties recede.” In afternoon trade on October 7, the ringgit appreciated 3.6% to 4.2175 to the US dollar following the noon release of Malaysian trade data showing the biggest trade surplus in nine months (Aug: RM10.2b). Our year-end forecast for the USDMYR is 4.48.

Source: Kenanga Research - 8 Oct 2015