● Bank Negara Malaysia (BNM) international reserves remained relatively unchanged at USD111.1b (up marginally by about USD1.3m), as of 30 July 2021

− Sufficient to finance 8.1 months of retained imports and is 1.1 times total short-term external debt.

● An increase in other reserve assets, SDRs and gold equate a decline in foreign currency reserves and IMF reserve position

− Other reserve assets (+USD0.1b or 3.6% MoM to USD3.1b): reverted into an uptrend after two consecutive months of contraction.

− Foreign currency reserves (-USD0.08b or -0.1% MoM to USD103.2b): dropped for the first time since October 2020.

− IMF reserve position (-USD0.06b or -4.1% MoM to USD1.4b): largest contraction in 76 months.

● In ringgit terms, the BNM reserves hit another record high of RM461.8b (+RM0.3b or 0.1% MoM)

− USDMYR monthly average (4.203; Jun: 4.133): ringgit depreciated (-1.7% MoM; Jun: -0.2%) against the USD for the sixth consecutive month in July, breaching the 4.20 threshold for the first time since July 2020. The weakness in the ringgit was mainly due to the rising domestic COVID-19 cases, which almost doubled to an average of 11,655 cases in July from 5,987 cases in June.

− Regional currencies: broad-based depreciation against the greenback due to the global risk-off environment amid fears over the delta variant, led by THB (-3.7%), followed by PHP (-3.6%), and SGD (-1.6%) and IDR (-1.2%).

● BNM likely to hold its key interest rate at 1.75% for the rest of the year

− We opine that there is now at least a 40.0% chance that the BNM will cut the overnight policy rate (OPR) by another 25 to 50 basis points due to the current surge in domestic COVID-19 infections as more Delta variant cases were detected in Malaysia. However, at this juncture, the BNM is still expected to keep the OPR unchanged at 1.75% for the seventh straight meeting this September on the back of a positive economic outlook, as more states will likely be allowed to enter the Phase 2 of the National Recovery Plan in the next few weeks amid the country's swift vaccine rollout.

− USDMYR year-end forecast (4.03; 2020: 4.02): the local note is expected to gather momentum in the 4Q21 as the domestic economy may begin to fully reopen in October on expectations that more than 60.0% of the population are fully vaccinated and both the hospitalisation rate and ICU beds usage to drop to a manageable level. However, our current ringgit projection remains subject to significant downside risks such as domestic political turbulence, vaccine shortages and delays, Fed sooner-than-expected tapering and the emergence of a more virulent COVID-19 variants.

Source: Kenanga Research - 9 Aug 2021