● Bank Negara Malaysia (BNM) international reserves rose by USD0.2b or 0.1% MoM to USD111.1b, as of 30 June 2021

• Sufficient to finance 8.2 months of retained imports and is 1.1 times total short-term external debt.

● An increase in gold and foreign currency reserves outweighed a decline in IMF reserve position

• Gold (+USD0.1b or 4.8% MoM): largest holdings in over five years as BNM bought more gold amid rising global uncertainties surrounding the monetary policies, inflation and COVID-19 situation.
• Foreign currency reserves (+USD0.1b or 0.1% MoM to USD103.3b): highest level recorded since December 2014 as the local bond market continued to record net foreign inflows (for thirteen straight months as of May).
• IMF reserve position (-USD0.05b or -3.3% MoM to USD1.4b): fastest deceleration in 28 months.

● In ringgit terms, the BNM reserves hit a new record high of RM461.6b (+RM0.9b or 0.2% MoM)

• USDMYR monthly average (4.133; May: 4.127): ringgit weakened (-0.2% MoM; May: -0.2%) against a strengthening USD for the fifth straight month in June, reaching its lowest level since October 2020. Despite higher Brent crude oil price and lower 10-year US Treasury yield, the local note was dragged by the Fed’s abrupt change of tone and an amplified COVID-19 uncertainty.
• Regional currencies: excluding the IDR (0.02% MoM), most currencies depreciated against the greenback [THB (- 0.5%), PHP (-0.4%), SGD (-0.3%)] as the USD index rose to above the 91.0 level after the US Federal Reserve delivered a hawkish surprise at the June FOMC meeting.

● BNM to maintain status quo on policy rate (1.75%) throughout the rest of 2021

• Even though most of the states in Malaysia are still in the Phase 1 of the National Recovery Plan and the number of active COVID-19 cases have started to rise again, the prospect of growth recovery in the 2H21 remains intact, supported by the extended fiscal measures (i.e. PEMULIH), faster pace of vaccination from July onwards and sustained demand in the external sector. Nevertheless, should any of the highly infectious variants (i.e. Delta, Lambda) become prevalent in Malaysia, resulting in further extension of the COVID-19 restrictions, we believe BNM may resume its easing cycle and slash the overnight policy rate by another 25 to 50 basis points.
• USDMYR year-end forecast (4.03; 2020: 4.02): while we pencil in a short-term USD strength amid the current global risk-off market sentiment, the ringgit is expected to find a better footing moving into the 4Q21 on expectations that Brent crude oil price will remain relatively high, Malaysia’s higher-yielding markets remain attractive and the domestic economy begins to reopen as more than 60.0% of the population are fully vaccinated against COVID-19 by October.

Source: Kenanga Research - 8 Jul 2021