● Bank Negara Malaysia (BNM) international reserves returned to a downtrend, falling by USD3.8b or -3.4% MoM, its sharpest drop in four years, to USD109.0b as of 30 June 2022

- Sufficient to finance 5.8 months of imports of goods and services (previously retained imports) and is 1.1 times total short-term external debt.

● The fall was mainly attributable to a sharp decline in foreign currency reserves

- Foreign currency reserves (-USD3.3b or -3.3% MoM to USD97.0b): fell to its to lowest level since June 2020, reflecting rising capital outflows and loss from the quarterly foreign exchange revaluation, due to a 2.9% rise in the USD index (DXY) on a monthly basis.

- Special drawing rights (-USD0.3b or -4.5% MoM to USD5.7b): fastest pace of decline in more than six years.

- Gold (-USD0.1b or -4.7% MoM to USD2.3b): first decline since September last year and steepest deceleration in 15 months as gold prices fell by 2.1% MoM and 6.2% QoQ due to a stronger USD.

● In ringgit terms, the value of BNM reserves increased by RM5.9b or 1.2% MoM to RM480.1b

- USDMYR monthly average (4.399; May: 4.380): the ringgit weakened to its lowest level since April 2017 against the greenback as the DXY soared to an average of 103.9 in June (May: 103.1) due to the Fed’s aggressive monetary policy tightening amid US red-hot inflation. On top of that, the local note was also pressured by the narrowing of MYUS 10-year government bond yields (average June: 114.5 bps; May: 141.4 bps).

- Regional currencies: tracking the same path, all of the ASEAN-5 currencies ended in the red against a strengthening USD in June due to an elevated level of global inflation and growing recessionary fears, led by PHP (-2.3%), followed by THB (-1.4%), IDR (-0.5%) and SGD (-0.1%).

● BNM is expected to continue to tighten its monetary policy amid improving domestic economic outlook and to pre-empt rising inflationary risk

- The BNM is likely to deliver its third rate hike in a row in September due to the strengthening of economic activity and looming inflation threat. In total, we expect another 75 bps overnight policy rate (OPR) hike over the next six to nine months, bringing the OPR to settle at 3.0% in 1Q23. However, the central bank may pause its policy tightening cycle much earlier than expected if there are any signs of an economic slowdown.

- USDMYR year-end forecast (4.35; 2021: 4.17): despite the ongoing strong USD dynamics due to the looming recession concerns and Fed’s continued hawkishness, the ringgit is still expected to appreciate from current level. The main catalysts for the ringgit’s strength are positive domestic economic prospects, Malaysia’s relative political stability, potential China’s full reopening in 4Q22 and European Central Bank’s faster-than-expected tightening.

Source: Kenanga Research - 8 Jul 2022