• After three straight months of decline, Bank Negara Malaysia (BNM) international reserves rebounded by USD3.8b or 3.5% MoM, reaching a three-month high of USD112.3b as of 30 November 2023
  
  − Sufficient to finance 5.4 months of imports of goods and services (previously retained imports: 7.1 months) and is 1.0 time total short-term external debt.

• The notable monthly gain was mainly driven by a sharp rebound in the foreign currency reserve
  
  − Foreign currency reserves (+USD3.7b or 3.8% MoM to USD100.2b): back to above the USD100.0b level due to the higher converted value of non-dollar assets and a return of net portfolio capital inflows. Notably, the BNM's net FX reserves fell to a record low of USD54.9b in October (Sep: USD56.7b) as the short position in FX swaps widened to USD25.1b (Sep: USD24.1b).
  
  − Other reserve assets (+USD0.1b or 3.7% MoM to USD2.8b): increased at the fastest pace in ten months.
  
  − Meanwhile, special drawing rights, IMF reserve position and gold reserve were relatively unchanged.

• In ringgit terms, the value of BNM reserves increased sharply by RM17.8b or 3.5% MoM to RM527.2b
  
  − USDMYR monthly average (4.69; Oct: 4.75): the growing anticipation of a Fed pivot, triggered by the US faltering labour market, diminishing inflationary pressure and fragility in the housing market has notably weakened the USD, providing a lift to the ringgit. On top of that, the better-than-expected Malaysia 3Q23 GDP reading, coupled with the government’s ongoing commitment towards fiscal consolidation and the narrowing of the 10-year MY-US government bond yield differential has further helped to boost the local note.
  
  − Regional currencies: other ASEAN-5 currencies, namely the THB (3.0%), SGD (1.6%) and IDR (1.2%), also reversed their losses against the USD. This shift was attributed to the weakening of the greenback, evidenced by a sharp decline in the USD index (DXY) (average November: 104.5; Oct: 106.4). While, the PHP managed to extend its gains (1.9%), as the Bangko Sentral ng Pilipinas' maintained its hawkish bias.

• Despite upside risks to prices, BNM is likely to maintain status quo in 2024, which would benefit the ringgit
  
  − Despite the potential upward pressure on prices arising from the government's subsidy rationalisation, a service tax hike and the uncertain geopolitical landscape, the slowing external demand and the surge in global supply could counterbalance these factors, keeping inflation below the 3.00% threshold next year. Alongside an improved domestic growth projection, it is likely that the BNM may maintain the overnight policy rate at 3.00% in 2024.
  
  − USDMYR year-end forecast (4.44; 2022: 4.40): the local note is expected to maintain its strength against the greenback in December. This is attributed to the seasonal weakness of the USD and our expectation of continued disinflationary trends in the US, which might lead the Fed to adopt either a centrist or dovish stance. Ongoing US macro underperformance, which contributes to the market's dovish narrative of the Fed, is also likely to further undermine the DXY, supporting the ringgit’s appreciation. Looking ahead, a further shift in portfolio allocation toward emerging markets, combined with the expectation that the BNM may keep its current stance unchanged for at least the next 12 months, is likely to support the continued upward trajectory of the ringgit, potentially to reach the 4.25 level by end-2024.

Source: Kenanga Research - 8 Dec 2023