● Bank Negara Malaysia (BNM) international reserves remained on an uptrend for a fourth straight month, up by USD0.8b or 0.8% MoM to a six-month high of USD104.2b as at 30 July 2020

− Sufficient to finance 8.4 months of retained imports and is 1.1 times the total short-term external debt.

● Higher foreign reserves attributable to an increase in foreign currency reserves and other reserve assets

− Foreign currency reserves (+USD0.6b or 0.6% MoM to USD97.2b): highest level in six months.

− Other reserve assets (+USD0.2b or 8.8% MoM to USD2.4b): fastest expansion in five months.

● In Ringgit terms, the value of BNM reserves rose to a record high; it increased by RM3.3b or 0.7% MoM to RM446.4b

− USDMYR: traded at an average of RM4.2614 in July (Jun: RM4.2730), strengthening by 0.3% MoM (Jun: 1.5%) partly attributable to continued recovery in oil prices which rose to a five-month high (USD43.2/barrel; Jun: USD40.3) and favourable risk environment amid resumption of economic activities in various countries.

− Regional currencies (monthly average): Leading the pact, the Philippines Peso strengthened by 1.3% against the greenback, followed by Singapore Dollar (0.5%), while Thai Baht (-0.9%) and Indonesian Rupiah (-2.7%) bucked the trend.

● BNM may lean towards further monetary easing to reinforce economic recovery

− This year, BNM has slashed a total of 125 bps of the overnight policy rate (OPR) in a bid to shore up economic growth hit by the COVID-19 pandemic amid subdued inflation. Given the dovish tone derived from July's monetary policy statement, which noted a broad-based slump in the labour market and hampered confidence level, we believe that BNM may embark on another 25 bps cut, bringing the OPR to a new record low of 1.50% at the next policy meeting in September.

− USDMYR year-end forecast (4.30; 2019: 4.09): Forecast retained on the expectation of persistence weakness in the global trade environment, relatively weak global oil price this year, elevated geopolitical tension between major economies (e.g. US-CN-HK), fears over a new wave of COVID-19 infections, and domestic political issues.

Source: Kenanga Research - 10 Aug 2020