● Bank Negara Malaysia (BNM) international reserves remained on an uptrend for the second consecutive month, rising by USD2.3b or 2.1% MoM to a 31-month high of USD107.6b as of 31 December 2020

- Sufficient to finance 8.6 months of retained imports and is 1.2 times total short-term external debt.

● This was attributable to an increase in foreign currency reserves, other reserve assets and gold

- Foreign currency reserves (+USD1.8b or 1.9% MoM to USD99.7b): grew at a faster rate, reaching a 31- month high partly lifted by revaluation gains.

- Other reserve assets (+USD0.4b or 14.9% MoM to USD2.9b): increased to its highest level in 32 months.

- Gold (+USD0.1 or 2.1% to USD2.4b): fastest pace of increase in three months.

● In ringgit terms, the value of BNM reserves marked the largest decline in three months, decreasing by RM5.3b or -1.2% MoM to RM432.2b

- USDMYR: gained 1.4% MoM (Nov: 0.9%) and traded at an average of RM4.05 in December (Nov: RM4.11), reaching its strongest level since 2018, on the back of a weakening USD, positive vaccine sentiment and improving average Brent crude oil price.

- Regional currencies (monthly average): broad-based appreciation due to the weakened USD, led by the Thai Baht (1.3%), followed by the Singapore Dollar (1.1%), Indonesian Rupiah (0.5%) and Philippines Peso (0.4%).

● Higher probability that BNM will keep rates on pause in 2021

- As economic conditions improve following the lifting of the interstate travel ban on 7th Dec, along with positive vaccine sentiment, BNM is expected to stand pat on policy rate (1.75%) in the near term. Nevertheless, should the ongoing COVID-19 pandemic worsen, we believe that BNM still has the capacity to cut the OPR by another 25 to 50 basis points.

- USDMYR year-end forecast (3.95; 2020: 4.02): The ringgit upside is projected to continue into 2021, on the back of sustained USD weakness and an expected improvement in the COVID-19 situation. With incoming President Biden free to pass progressive policies after Democrats secured control of the US Senate and the US Fed planning to continue its massive bond-buying programme, the USD will remain pressured throughout 2021. However, a potential domestic general election in 1H21 and unpredictable global commodity prices may cap ringgit’s upside.

Source: Kenanga Research - 11 Jan 2021