● Bank Negara Malaysia (BNM) international reserves reverted to a downtrend, declining by USD0.9b or 0.8% MoM to USD114.3b as of 28 February 2023

- Sufficient to finance 5.0 months of imports of goods and services (previously retained imports) and is 1.0 time total short-term external debt.

● The downtrend was primarily attributable to a depletion in the foreign currency reserves

- Foreign currency reserves (-USD0.8b or -0.8% MoM to USD102.2b): fell for the first time in three months, possibly due to FX intervention by the central bank, reduced exports receipts and capital outflows, as well as a decrease in the USD-converted value of other currency-based assets. In the meantime, the central bank's net foreign currency reserves increased marginally to USD60.2b in January (Dec: USD59.3b).

- Meanwhile, other reserve assets, gold, special drawing rights and IMF reserve position remained fairly unchanged.

● In ringgit terms, the value of BNM reserves declined by RM4.2b or 0.8% MoM to RM501.6b

- USDMYR monthly average (4.363; Jan: 4.322): after three consecutive months of appreciation, the Ringgit lost some of its gains in February due to the stronger demand for USD amid continued hawkish rhetoric by the Fed, as well as the weakening of the yuan due to rising US-CN geopolitical tensions. Furthermore, the Ringgit was negatively affected by the disappearance of its positive yield advantage over US Treasury for the first time in over a decade.

- Regional currencies: tracking the same path, THB (-2.6%) and SGD (-0.5%) also weakened against the greenback as the USD index climbed to an average of 103.67 in February (Jan: 102.69). However, IDR strengthened by 1.1% due to Indonesia’s (ID) better-than-expected 4Q22 GDP reading and solid ID-US 10-year government bond yield differential, while PHP appreciated by 0.4% due to Bangko Sentral ng Pilipinas' aggressive rate hike (+50 bps).

● BNM is expected to maintain status quo amid global economic uncertainties and decelerating domestic inflation

- We reckon that the BNM has concluded its policy normalisation cycle and will opt to maintain the overnight policy rate (OPR) at its current level on March 9 due to indications of a slowdown in domestic inflation and the ongoing global economic deceleration. At this juncture, it is likely that the BNM may retain the OPR at 2.75% until end-2023, but major shifts in economic conditions in the coming months may prompt BNM to re-evaluate their rate adjustments.

- USDMYR year-end forecast (4.11; 2022: 4.40): the local note may continue to trade under pressure around the 4.46 - 4.50 zone in the next few weeks as the BNM is expected to stop short at 2.75%, while the Fed may continue to hike by another 25 bps in March. The weakening trend of the ringgit is likely to persist for the time being, with the possibility of a reversal only emerging in 2H23. This expected turnaround is contingent on two factors, firstly, the Fed signalling an end to their interest rate hikes and secondly, China experiencing a robust economic recovery.

Source: Kenanga Research - 8 Mar 2023