Increase of US$0.7b in October. Malaysia’s foreign exchange reserves fell by US$0.1b in the 2H of September after an increase of US$0.8b in the 1H. In total, reserves rose by US$0.7b during the month of September, the first monthly increase after four straight months of sharp losses. As at October 31, the international reserves held by Bank Negara Malaysia totalled US$94.0b, just above the six-year low of US$93.3b at end-September.

Reserves at 12-month high in ringgit terms. The weaker local currency meant that the ringgit equivalent of foreign reserves was however at a 12- month high of RM417.9b. The current reserves level is sufficient to finance 8.7 months of retained imports and is 1.2 times the short term external debt.

Convincing recovery. October was the first monthly increase after four months of sharp losses for the BNM forex reserves. The lower rate of decline in the previous month of September gave an indication that the deterioration in reserves was abating and the October increase in reserves is confirmation of this. From the current level, international reserves should continue to increase from running current account surpluses and BNM taking a light-handed approach in foreign exchange markets.

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 highly likely to raise rates at the upcoming December 15-16 meeting. Recent comments by the Federal Reserve chair Janet Yellen point to the much-anticipated rate hike taking place at any future meeting with assessments made on “a meeting-by-meeting” basis. Thus, a December rate hike is still very much in play. Meanwhile, the ringgit is to remain undervalued until external and domestic uncertainties recede. Our year-end forecast for the USDMYR is maintained at 4.48.

Source: Kenanga Research - 9 Nov 2015