• Bank Negara Malaysia (BNM) international reserves continued to decline by USD1.0b or -0.9% MoM to a five- month low of RM112.8b as of 30 April 2024
  
  − It is sufficient to finance 5.5 months of imports of goodsand services (previously retained imports: 6.6 months)and is 1.0 time total short-term external debt.

• The decline was primarily attributed to a continued drop in foreign currency reserves and other reserve assets
  
  − Foreign currency reserves (-USD0.7b or -0.7% MoM toUSD100.6b): decreased for the third consecutive month,potentially due to a reduction in the converted value ofnon-USD assets, BNM’s foreign exchange intervention,outflows from the capital market, and lower repatriationof export earnings.
  
  − Other reserve assets (-USD0.4b or -14.1% MoM toUSD2.3b): declined at the fastest pace since August2018.
  
  − Meanwhile, special drawing rights, gold and IMF reservepositions remained relatively unchanged.

• In ringgit terms, the value of BNM reserves reached the second-highest level on record of RM534.3b (-RM4.7b or -0.9% MoM)
  
  − USDMYR monthly average (4.77; Mar: 4.72): Despite erasing all its March gains, the ringgit remains the least worst-performing currency in the ASEAN-5 against the USD, partly due to intervention by the local authority. The ringgitfaced pressure from the still elevated US core PCE reading and solid retail sales figures, denting hopes for a Fedrate cut.
  
  − Regional currencies: Following the ringgit's 1.1% depreciation, other ASEAN currencies also weakened against theUSD, including the SGD (-1.2%), PHP (-1.9%), THB (-2.2%), and IDR (-2.4%). This trend is largely due to thestrengthening USD index (April average: 105.4; March: 103.7), driven by robust US data and risk-off sentimentstemming from geopolitical tensions.

• BNM is expected to maintain the status quo despite upside risk to prices
  
  − While facing potential upward pressures on inflation due to the prospect of subsidy rationalisation in 2H24 and therecent wage hike for civil servants, inflation rates are expected to remain stable, staying below 3.0% for both 2024and 2025. Given our optimistic growth forecast, the BNM is expected to uphold its current policy rate of 3.00% forthe next 6-12 months.
  
  − USDMYR year-end forecast (4.42; 2023: 4.59): Despite the hotter-than-expected inflation readings in the US,indicators such as weak labour demand, sluggish wage growth, and a rise in corporate bankruptcies, credit carddefaults, and auto delinquencies suggest that vulnerable segments of the economy are grappling with elevatedinterest rates. Anticipated further economic softness and the potential easing of inflationary pressures in the comingmonths could prompt the Fed to consider a rate cut as early as September. Concurrently, with expectations of theBNM maintaining its current stance for the remainder of the year and the government's commitment to fiscaldiscipline, there may be strong potential for the ringgit to strengthen below the 4.50/USD level by the end of 2024.

Source: Kenanga Research - 9 May 2024