• Bank Negara Malaysia (BNM) international reserves reverted to a downtrend, declining marginally by USD0.5b or -0.5% MoM to a two-month low of RM114.3b as of 29 February 2024
  
  − Sufficient to finance 5.4 months of imports of goods and services (previously retained imports: 6.8 months) and is 1.0 time total short-term external debt.

• The decline was mainly attributed to a slight reduction in foreign currency reserves and other reserve assets
  
  − Foreign currency reserves (-USD0.4b or -0.4% MoM toUSD101.8b): first drop in four months, potentially due to a continued sell-off in Malaysia's debt securities, a stronger USD and BNM’s FX intervention.
  
  − Other reserve assets (-USD0.1b or -5.1% MoM to USD2.7b): fastest pace of drop in 17 months.
  
  − Meanwhile, special drawing rights, gold and IMF reserve positions remained relatively unchanged.

• In ringgit terms, the value of BNM reserves declined by RM2.7b or 0.5% MoM to RM524.4b
  
  − USDMYR monthly average (4.77; Jan: 4.68): despite stronger-than-expected Malaysia's exports reading and Beijing's measures to shore up the economy, the ringgit depreciated to its weakest level on record in February. This was mainly due to the hot US core CPI reading, which dampened investors' expectations of an early Fed pivot. As a result, the USD index (DXY) soared to as high as 104.96, and the 10-year MGS-UST negative yield differential widened to an average of -37.4 bps (Jan: -22.5 bps). However, joint efforts by the government and BNM to bolster inflows into the domestic FX market have helped the ringgit to appreciate to 4.74/USD by the end of February.
  
  − Regional currencies: following the same trajectory as the weak ringgit (-1.8%), all other ASEAN-5 currencies depreciated against the strengthening USD. The decline was led by THB (-1.9%), followed by SGD (-0.7%), IDR (- 0.2%), and PHP (-0.1%). This was a result of the DXY surging by over 1.1% to an average of around 104.1 in February (Jan: 102.9), partly attributed to a downturn in investors' risk appetite.

• Price stability and sustainable economic growth may keep the BNM on hold for the foreseeable future
  
  − Stable domestic headline and core inflation figures, along with our solid GDP growth outlook of around 4.5-5.0% in2024, suggest that the BNM may maintain its current monetary policy setting throughout the rest of the year.
  
  − USDMYR year-end forecast (4.42; 2023: 4.59): despite global economic uncertainty and Fed Powell's hawkish statement, we still believe that it is likely the Fed may begin cutting rates from June onwards, given evidence of persistent disinflation and a cooling labour market in the next few months. If signs of weakness in the job market, such as the slowdown in US services PMI and lower private payrolls in February, continue to emerge, the Fed may be convinced to dial back its policy restraint. Increasing doubts over the strong US economic outlook may lead investors to recalibrate Fed rate cut expectations, weakening the USD, and boosting the appeal of risk-on assets. With additional policy support from China aimed at revitalising its economy, coupled with the BNM's efforts to boost FX inflows, the ringgit is expected to strengthen towards the 4.42/USD level by end-2024. However, maintaining investors’ confidence in the country's fiscal policy direction remains vital for attracting investments into Malaysia.

Source: Kenanga Research - 8 Mar 2024