● Bank Negara Malaysia (BNM) international reserves fell by USD0.8b or 0.7% MoM (Dec: 0.2%), the sharpest drop in four months to USD116.1b as of 31 January 2022

- Sufficient to finance 7.5 months of retained imports and is 1.2 times total short-term external debt.

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

- Foreign currency reserves (-USD0.7b or 0.7% MoM to USD103.4b): fastest deceleration since September 2021, partly due to capital outflows from domestic financial markets amid narrowing MY-US government bond yield spreads.

- Other reserve assets (-USD0.1b or -2.7% MoM to USD3.0b): the lowest level recorded in seven months.

- Gold (+USD0.1b or 2.2% MoM to USD2.3b): largest holdings in 11 months, reflecting a flight-to-safety amid global inflation worries and geopolitical risks.

● In ringgit terms, the value of BNM reserves marked the largest decline in 13 months, falling by RM3.1b or -0.6% MoM to RM483.7b

- USDMYR monthly average (4.189; Dec: 4.211): the ringgit managed to reverse some of its last month's losses against the USD despite the overall risk-off mood in January due to the more hawkish Fed and Ukraine-Russia tensions. The appreciation in the local note was primarily due to a double-digit increase of 14.4% in average Brent crude oil price and a sell-off in US high growth stocks.

- Regional currencies: majority of the regional currencies also erased most of their losses against the USD in January, led by THB (1.0%) and SGD (1.0%), mainly as the USD index fell to an average of 95.9 in January (Dec: 96.2). Bucking the trend, PHP (-1.9%) and IDR (-0.04%) depreciated against the USD due to capital outflows amid higher 10-year US Treasury (UST) yield (average Jan: 1.76%; Dec: 1.46%).

● BNM to remain accommodative in the near term to further support domestic economic recovery in 2022

- Despite improving domestic macroeconomic readings and Malaysia’s nearing transition to endemicity, the BNM is expected to continue to keep the country’s monetary policy loose to support the ongoing economic recovery at least until end of 1H22. We reckon that the BNM is not in any rush to raise the overnight policy rate above the current 1.75% level as inflation is still under control and as the current Omicron wave may pose downside risk to recovery.

- USDMYR year-end forecast (4.10; 2021: 4.17): in the coming weeks, the direction of the local note will be mainly influenced by the crude oil prices, BNM outlook on the domestic economy and the government’s response to the current Omicron surge. In mid-March, a potential 25-50 basis points Fed rate hike may push the 10-year UST yield above the 2.0% level, exerting pressure on most emerging Asian currencies, including the ringgit.

Source: Kenanga Research - 11 Feb 2022