OVERVIEW

● A favourable rise in forex reserve kick-starts the New Year in spite of concerns over the on-going US-China trade war and prospects of a slowdown in global growth. Bank Negara Malaysia (BNM) foreign international reserves increased by USD0.7b or 0.7% MoM to USD102.1b as at January 31, after it fell by USD0.6b in December. Similar to the preceding month, January’s reserves position remains adequate to finance 7.4 months of retained imports and is 1.0 time the short-term external debt.

● The month’s increase in foreign reserves was mainly attributable to a sharp rise in foreign currency reserves, which edged higher by USD0.6b or 0.6% MoM (Dec: -0.6%) to USD96.3b in January. Additionally, other reserve assets rebounded by 4.8%, adding USD0.1b to USD2.2b in January.

● In Ringgit terms, the value of forex reserves increased by 0.7% MoM, adding RM2.8b to RM422.3b as at end January from RM419.5b in December. In January, the USDMYR was traded at an average of RM4.12 versus RM4.17 in the preceding month, appreciating as much as 1.3% MoM (Dec: +0.3%), marking its second month of appreciation primarily due to weakening USD. Meanwhile, other Asian currencies, led by the Thai Baht and followed by the Indonesian Rupiah, Philippines Peso and Singapore Dollar appreciated by 2.8%, 2.3%, 0.6% and 1.1% respectively on MoM against the greenback.

● Despite ample foreign reserves, external uncertainties continue to pose risk to domestic financial market and economic growth. On the trade war front, tensions persist, though we remain cautiously optimistic on the outcome of the US and China trade negotiations which would be due by March 1. Meanwhile, China economic slowdown appears to be more concerning, fears over eurozone economic slump becoming increasingly evident with Italy falling into another recession while Germany’s economy is weakening as the global trade slowdown is affecting its exports. Additionally, the US Federal Reserve is taking a less hawkish stance this year, with fewer or no rate hike expected. Against this backdrop, we do not discount a trend reversal to happen but due to uncertainties, we still expect outflow of hot money to persist but likely lesser.

● We maintain our view that Bank Negara Malaysia (BNM) to hold the OPR steady at 3.25% in 2019 as domestic indicators are pointing towards growth moderation and inflation is expected to remain subdued on the back of weaker global oil prices and demand. However, we expect BNM would gradually turn dovish and may not hesitate to cut interest rates if there are signs that external factors increasingly threaten domestic growth. The probability for that to happen is low for now as overall domestic fundamentals remain intact underpinned by low unemployment rate (Dec: 3.3%), decent current account surplus, a benign inflation, along with ample liquidity in the financial market. On the ringgit outlook, we expect its recent pick-up may have legs and test the 4.05 level against the USD in the near term. However, we still maintain our USDMYR year-end forecast of 4.10 on the back of weaker global economic growth and the natural tendency for global capital to flee to safe haven assets mainly US Treasuries.

Source: Kenanga Research - 13 Feb 2019