● Bank Negara Malaysia (BNM) international reserves rebounded by USD1.2b or 1.0% MoM to a one-year high of USD115.5b as of 31 March 2023

- Sufficient to finance 5.1 months of imports of goods and services (previously retained imports) and is 1.1 time total short-term external debt.

● The rise was attributable to revaluation gains in foreign currency and gold reserves

- Foreign currency reserves (+USD0.9b or 0.9% MoM to USD103.1b): rebounded to a 14-month high due to capital inflows from domestic financial markets and quarterly revaluation gains amid a fall (-2.3% MoM or - 1.0% QoQ) in the USD index (DXY).

- Gold (+USD0.2b or 8.7% MoM to USD2.5b): largest holdings on record due to an increase (8.9% MoM or 8.0% QoQ) in gold price amid rising safe-haven buying.

- Special drawing rights (+USD0.1b or 1.8% to USD5.8b): increased to a 10-month high.

● In ringgit terms, the value of BNM reserves hit a new record high of RM509.9b (+RM8.3b or 1.6% MoM)

- USDMYR monthly average (4.464; Jan: 4.363): the ringgit extended its losses in March due to stronger USD demand at the beginning of the month due to Fed Powell's hawkish testimony and increasing US-China tensions. However, the sudden collapse of the Silicon Valley Bank has caused a shift in the Fed's tone and a recalibration in the Fed policy expectations, leading to a weakening of the DXY below the 103.0 level in the final week of March.

- Regional currencies: all ASEAN-5 currencies also weakened against the greenback as the USD index climbed marginally higher to an average of 103.77 in March (Feb: 103.67). The depreciation was led by MYR (-2.3%), followed by IDR (-1.1%), THB (-1.1%), SGD (-0.6%) and PHP (-0.02%).

● BNM likely to hold policy rate at 2.75% for the rest of the year amid slowing inflation and cooling external demand

- Given the downtrend in both headline and core inflation, and the ongoing global economic slowdown, BNM is expected to keep the overnight policy rate (OPR) unchanged at 2.75% in May. Looking ahead, BNM may maintain its current policy stance for the rest of 2023 as we believe that the central bank has reached the end of its policy normalisation cycle. However, any unexpected shocks to the global financial market or increasing geopolitical risks may prompt BNM to reconsider its stance and adjust the OPR accordingly.

- USDMYR year-end forecast (4.11; 2022: 4.40): the trajectory of the ringgit in the near term may continue to be influenced by various factors. Any signals that the Fed may pivot towards easing its policy should compel investors to turn to emerging markets for potential higher returns, benefiting the ringgit. Additionally, the ringgit may also benefit from Malaysia's relatively robust economic outlook and political stability. However, the ringgit's performance is dependent on external factors, such as the progress of the ongoing banking crisis in the west and geopolitical turmoil.

Source: Kenanga Research - 10 Apr 2023