• Bank Negara Malaysia (BNM) international reserves remained on a downtrend, depleting by USD2.4b or - 2.1% MoM to a 10-month low of USD110.1b as of 29 September 2023
  
  − Sufficient to finance 5.1 months of imports of goods and services (previously retained imports: 7.0 months) and is 1.0 time total short-term external debt.

• The major driver for the decline can be attributed to a sharp drop in foreign currency reserves
  
  − Foreign currency reserves (-USD2.3b or -2.2% MoM to USD98.0b): fell to its lowest level since October 2022 as BNM intervened in the FX market to curb the ringgit’s depreciation in an effort to ensure exchange rate stability. Also, the fall can be attributable to a decrease in the converted value of non-USD assets.
  
  − Gold (-USD0.1b or -3.4% MoM to USD2.3b): declined to its lowest level in seven months as gold price fell by 4.9% MoM to USD1848.6/troy ounce due to a stronger USD.
  
  − Meanwhile, special drawing rights, other reserve assets, and IMF reserve position remained fairly unchanged.

• In ringgit terms, the value of BNM reserves declined further to RM517.1b (-RM9.7b or -1.8% MoM)
  
  − USDMYR monthly average (4.68; Aug: 4.61): the ringgit weakened close to the 4.70/USD on average in September, primarily due to the robust demand for the USD and the depreciation of the yuan. The USD index (DXY) surged to as high as 106.7, supported by strong US economic data and persistent core inflation reading. Concurrently, the yuan depreciated by 0.7%, averaging around 7.30/USD throughout September, largely influenced by China's deteriorating economic prospects. To add, the local note faced additional pressure due to the widening of MY-US 10-year government bond yield differential.
  
  − Regional currencies: tracking the same path as the weak ringgit (-1.6%), all other ASEAN-5 currencies, namely the THB (-2.4%), SGD (-0.9%), PHP (-0.8%) and IDR (-0.8%), also weakened against the USD as the DXY soared to an average of 105.3 in September (August: 103.1).

• BNM to maintain overnight policy rate (OPR) status quo amid stable inflation and slowing growth outlook
  
  − Despite the upside risks to prices due to factors such as the rising threat of food insecurity, geopolitical tensions, and the potential removal of domestic subsidies, it is anticipated that both headline and core inflation rates will remain stable within the range of 2.5% to 3.5% over the next 6 to 12 months. This, combined with the weakening global growth prospects, may keep the BNM on course to maintain the OPR at a neutral level of 3.00% until end-2024.
  
  − USDMYR year-end forecast (4.44; 2022: 4.40): we maintain our neutral-to-bullish stance on the ringgit and anticipate that the local note may appreciate from its current level to 4.44 by end-2023. The Fed's "higher-for-longer" narrative may soon change as US economic growth disappoints on the downside, and price pressures abate. Considering that policy moves may take 9 to 12 months to fully impact the real economy, the effects of rate hikes, which could be as much as 100 to 225 basis points, have not been fully realised yet. This, coupled with the resumption of US student loan repayments and dwindling household savings should lead to a significantly weaker US economy, potentially prompting more rate cuts next year. In such a scenario, the DXY should weaken considerably, benefiting the ringgit.

Source: Kenanga Research - 9 Oct 2023