● Bank Negara Malaysia (BNM) international reserves returned to an uptrend, rebounded marginally by USD0.2b or 0.2% MoM to USD109.2b as of 29 July 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.

● This was underpinned by an increase in foreign currency reserves, gold and other reserve assets

- Foreign currency reserves (+USD0.2b or 0.2% MoM to USD97.2b): rebounded after contracting sharply in June (-USD3.8b) despite a stronger USD, reflecting a possible reversal in capital flows.

- Gold (+USD0.04b or 1.6% MoM to USD2.3b): increased slightly in July despite a 2.5% depreciation in gold price.

- Other reserve assets (+USD0.01b or 0.3% MoM to USD2.7b): reverted into an uptrend.

● In ringgit terms, the value of BNM reserves grew for the third consecutive month, increasing by RM0.7b or 0.1% MoM to RM480.8b

- USDMYR monthly average (4.441; Jun: 4.399): the ringgit breached the 4.40 threshold for the first time in 63 months against the greenback, mainly due to growing global recessionary fears as the Fed deploy another 75 basis points (bps) rate hike in July to curb US hotter-than-expected inflation. On top of that, the local note was also dragged by a weaker yuan due to China’s disappointing 2Q22 GDP reading and depreciating EUR due to Europe’s political uncertainty and ongoing Russia-Ukraine crisis.

- Regional currencies: for three months in a row, all ASEAN-5 currencies weakened against the greenback as the USD index surged to an average of 106.9 in July (June: 103.9) on renewed safe-haven demand due to the global risk-off environment. The depreciation was led by PHP (-4.2%), followed by THB (-4.1%), IDR (-2.0%) and SGD (-0.8%).

● Tightening global financial conditions and increasing inflationary pressures to keep BNM hawkish

- As Malaysia inflation rate is expected to average above the 4.0% level in 2H22 due to rising food prices amid swelling import costs, the BNM is likely to maintain its hawkish stance by increasing the overnight policy rate (OPR) for the third consecutive time in September. To add, in an effort to realign with other central banks’ hawkish stance, we reckon that the BNM may continue to tighten post-September meeting, with the OPR reaching 3.00% by 1Q23.

- USDMYR year-end forecast (4.35; 2021: 4.17): the ringgit may continue to trade above the 4.40 level in the near term as safe-haven demand is expected to remain strong amid heightened global recession fears, Fed's continued hawkishness, potential escalation of US-China tension and Europe’s looming energy crisis. However, the local note may start to gain ground against the greenback in 4Q22 due to the expectation of strong foreign investment flows into Malaysia amid an improvement in risk appetite for emerging market assets.

Source: Kenanga Research - 8 Aug 2022