● Bank Negara Malaysia (BNM) international reserves fell by USD1.1b or -0.9% MoM to USD115.2b as of 30 September 2021

- Sufficient to finance 8.2 months of retained imports and is 1.3 times total short-term external debt.

● This decline was attributable to a drop in foreign currency reserves and other reserve assets

- Foreign currency reserves (-USD0.9b or -0.9% MoM to USD102.5b): fastest deceleration in 18 months, partly due to revaluation losses.

- Other reserve assets (-USD0.1b or -3.8% MoM to USD3.0b): reverted into a contraction.

- Meanwhile, special drawing rights and gold holdings remained relatively unchanged at USD6.1b and USD2.2b respectively.

● In ringgit terms, the value of BNM reserves registered its first decline in nine months, falling by RM1.1b or -0.2% MoM to RM482.5b, partly due to the strengthening of the ringgit

- USDMYR monthly average (4.167; Aug: 4.217): after weakening over 4.0% year-to-date as of August, the ringgit pared some of its losses against the USD in September (1.2%; Aug: -0.3%). Despite a 0.2% MoM rise in average USD index, the local note managed to gather some momentum due to higher average Brent crude oil price of USD74.9/barrel (Aug: USD70.5/barrel) and improving domestic COVID-19 situation.

- Regional currencies: tracking the same path, IDR (1.0%), SGD (0.5%) and PHP (0.2%) also outpaced the strong USD uptrend and appreciate against the greenback as some COVID-19 restrictions were eased in the three countries. Bucking the trend, THB (-0.02%) weakened slightly against the USD as Thailand has pushed back plans to reopen its major cities to foreign arrivals amid the country’s low vaccination rates.

● BNM likely to keep the overnight policy rate (OPR) unchanged at 1.75% in the next six to nine months

- As the country prepares to shift from pandemic to endemic phase amid Malaysia's high vaccination rates, the BNM is expected to hold its key interest rate at 1.75% until at least 2Q22 to support a steady growth path for the economy. However, despite a positive economic outlook, BNM’s decision on the OPR remains subject to the pace of labour market recovery, the trajectory of headline inflation, domestic COVID-19 situation post-reopening and further progress on the national recovery plan.

- USDMYR year-end forecast (4.18; 2020: 4.02): the ringgit may gather some momentum and appreciate against the USD in the near term due to the optimism surrounding the reopening of the Malaysia economy, though the US debt ceiling situation may boost some safe-haven demand. From November onwards, the direction of the local note will be mainly influenced by external factors such as the Fed's tapering announcement, China's economic uncertainty, US-China trade relations and global COVID-19 situation.

Source: Kenanga Research - 8 Oct 2021