● Bank Negara Malaysia (BNM) international reserves remained on an uptrend for the fifth consecutive month, up by USD0.2b or 0.2% MoM to USD104.4b as at 28 August 2020, its highest level since Aug 2018

- Sufficient to finance 8.6 months of retained imports and is 1.1 times the total short-term external debt.

● This was mainly due to an increase in foreign currency reserves, other reserve assets and IMF reserve position

- Foreign currency reserves (+USD0.1b or 0.1% MoM to USD97.3b): highest level recorded in 7 months.

- Other reserve assets (+USD0.1b or 4.1% MoM to USD2.5b): third straight month of expansion.

- IMF reserve position (+USD0.05 or 4.0% MoM to USD1.3b): fastest expansion in two months.

● In Ringgit terms, the value of BNM reserves hit a new high of RM446.9 (+RM0.5b or 0.1% MoM) on the back of renewed US dollar weakness

- USDMYR: traded at an average of RM4.1852 in August (Jul: RM4.2614), appreciating by 1.8% MoM (Jul: 0.3%) against a weakening US dollar on the back of Fed’s major policy shift, rising Brent crude oil price and US-CN trade talk optimism.

- Regional currencies (monthly average): majority of the regional currencies strengthened in August, led by the Philippines Peso (1.3%), followed by Singapore Dollar (1.2%) and Thai Baht (0.7%). Bucking the trend, Indonesian Rupiah depreciated by 1.0% against the greenback due to Indonesia’s gloomy economic data.

● Higher probability of a pause in BNM’s rate cutting cycle

- Although BNM still has the capacity to cut the overnight policy rate by another 25bps at its 5th Monetary Policy Committee meeting later this week, we see a higher probability that it would pause the rate-cutting cycle.

- USDMYR year-end forecast (4.30; 2019: 4.09): Domestic economic recovery, increased demand for higher-yielding bonds and broad dollar weakness is expected to support the Ringgit in the near term, possibly prompting the local note to trade below the 4.10 level against the USD. However, we maintain our bearish outlook on the Ringgit on the back of local political uncertainty, US dollar potential upside post-election and the resurgence of COVID-19 cases globally.

Source: Kenanga Research - 7 Sept 2020