● Bank Negara Malaysia (BNM) international reserves remained on an uptrend for the third straight month, increasing by USD0.5b or 0.5% MoM to a 10-month high of USD115.2b as of 31 January 2023

- Sufficient to finance 5.3 months of imports of goods and services (previously retained imports) and is 1.0 time total short-term external debt.

● This was mainly attributable to a marginal increase in foreign currency reserves and other reserve assets

- Foreign currency reserves (+USD0.4b or 0.4% MoM to USD103.0b): expanded for the third consecutive month, mainly due to increased exports receipts and capital inflows, coupled with higher USD-converted value of other currency based-assets.

- Other reserve assets (+USD0.2b or 6.4% MoM to USD2.8b): largest holdings in 11 months.

- While gold, special drawing rights and IMF reserve position remained fairly unchanged.

● In ringgit terms, the value of BNM reserves rebounded slightly by RM2.5b or 0.5% MoM to RM505.8b

- USDMYR monthly average (4.322; Dec: 4.410): despite the narrowing of the 10-year MGS-UST yield premium to below 30 basis points (bps) due to BNM's surprise decision to pause its normalisation cycle, the ringgit strengthened for the third straight month in January to its highest level in nine months. The appreciation was mainly driven by China’s reopening optimism and the expectation of a less hawkish Fed.

- Regional currencies: all ASEAN-5 currencies appreciated for the second consecutive month against the weakening greenback, led by THB (4.8%), followed by IDR (2.1%), SGD (2.0%), MYR (2.0%) and PHP (1.3%). To note, USD index fell to 102.7 on average in January (Dec: 104.5) due to US cooling core inflation (5.7% YoY; Nov: 6.0%) and disappointing retail sales reading (-1.1% MoM; Nov: -1.0%).

● BNM is likely done with its normalisation cycle as inflation has peaked, while external risks to growth heightened

- On the monetary policy front, barring any unforeseen shocks or major policy shifts, especially on the fiscal side, the BNM is expected to hold the overnight policy rate (OPR) unchanged at 2.75% for the rest of the year. However, moving forward, the possibility of a rate change depends mainly on the inflation trend and growth outlook.

- USDMYR year-end forecast (4.11; 2022: 4.40): after appreciating to as strong as 4.25 (Feb 2) against the USD, the ringgit whipsawed back to above the 4.30 level due to the Fed's hawkish tone after the release of the surprisingly strong US non-farm payroll data of 517.0k (Dec: 260.0k; consensus: 185.0k). This weakening momentum is expected to continue in the next few months as the Fed may continue to hike interest rate until at least 5.00% while the BNM may stop short at 2.75%. However, the local note may gather strength in 2H23 due to a potential Fed pivot amid rising recession risk and further appreciation of the yuan amid its safe-haven appeal.

Source: Kenanga Research - 10 Feb 2023