• After three consecutive months of decline, Bank Negara Malaysia (BNM) international reserves grew by USD0.8b or 0.7% MoM, to RM113.6b as of 31 May 2024
  
  − It is sufficient to finance 5.4 months of imports of goodsand services (previously retained imports: 6.7 months)and is 1.0 time total short-term external debt.

• The rebound was primarily attributed to an increase in foreign currency reserves
  
  − Foreign currency reserves (USD0.9b or 0.9% MoM toUSD101.5b): increased for the first time in four months,mainly driven by substantial inflows (RM7.0b) from thecapital market, and potentially higher repatriation ofexport earnings.
  
  − IMF reserve positions (-USD0.1b or -5.1% MoM toUSD1.3b): fell at the fastest pace since March 2015.
  
  − Meanwhile, special drawing rights, gold and otherreserve assets remained relatively unchanged.

• In ringgit, the value of BNM reserves almost hit the highest level on record (RM538.1b; RM3.8b or 0.7% MoM)
  
  − USDMYR monthly average (4.72; Apr: 4.77): The ringgit rebounded in May, becoming one of the best-performingASEAN currencies as the USD index (DXY) depreciated. This depreciation was driven by a lack of hawkish convictionfrom the Fed, a softer US jobs report, a slowdown in core CPI, and weak retail sales. The prospect of policydivergence between the Fed and G10 central banks also exerted pressure on the USD. Additionally, the ringgit wasbolstered by the BNM's decision to maintain the policy rate and robust domestic macroeconomic readings.
  
  − Regional currencies: In line with the ringgit's appreciation (1.0%), most ASEAN currencies also strengthened againstthe USD. The SGD and THB each appreciated by 0.4%, while the IDR saw a modest gain of 0.1%. This occurred asthe DXY averaged lower at 104.9 in May (Apr: 105.4), with Fed Powell suggesting that a rate hike was unlikely. Incontrast, the PHP weakened for the second consecutive month, depreciating by 1.4% on average, mainly due tosignals from the Bangko Sentral ng Pilipinas indicating a readiness to pivot to monetary easing.

• Status quo expected by the BNM amid manageable inflation outlook and solid growth prospects
  
  − Inflation rates are expected to remain stable, averaging around 2.7% in 2024. Our inflation forecast has already takeninto account the recently announced diesel subsidy rationalisation and the potential floating of RON95 in 4Q24.Coupled with our optimistic growth forecast of 4.5-5.0%, the BNM is expected to keep the overnight policy rateunchanged at 3.00%, potentially until the end of 2025.
  
  − USDMYR year-end forecast (4.42; 2023: 4.59): Even though the latest nonfarm payroll figures exceeded all forecasts,pushing rate cut expectations back to November, we continue to see signs of weakness in the US economy. Jobseekers are taking longer to find work, firms are laying off workers to cut costs, and with mounting credit card debtand higher mortgage bills, something is likely to break soon. This builds the case for a Fed rate cut in September.Combined with Malaysia's solid fundamentals, the ringgit is set to appreciate. The government's efforts to repatriateforeign income and its commitment to fiscal consolidation may also help strengthen the local note.

Source: Kenanga Research - 11 Jun 2024