KUALA LUMPUR: Bank Negara Malaysia's international reserves increased by US$2.1 billion or 1.9 per cent month-on-month (MoM) to US$116.8 billion as of Aug 30, the highest level since December 2021.
Despite this increase from July, Kenanga Research said the central bank's reserve adequacy in terms of import coverage dipped to 5.4 months (July: 5.5 months), likely due to a surge in imports.
Additionally, the reserves remain just sufficient to cover 1.0 time the total short-term external debt, barely meeting the International Monetary Fund's minimum recommended adequacy level.
Kenanga Research said the rise in reserves was primarily driven by a sharp increase in foreign currency reserves, boosted by significant capital inflows.
Foreign currency reserves (US$2.1 billion or 2.0 per cent MoM to US$104.5 billion) increased to an almost 10-year high, supported by significant foreign inflows (RM11.5 billion) into the capital market, along with potentially higher repatriation of export earnings and foreign direct investment.
Notably, Bank Negara's net FX reserves increase rose for the third consecutive month to US$59.3 billion in July (June: US$59.1 billion).
However, the short position in FX swaps surged to a record high of US$29.3 billion indicating continued Bank Negara intervention.
Gold, special drawing rights, other reserve assets and IMF reserve positions remained relatively unchanged.
In ringgit terms, the value of Bank Negara's reserves hit another record high of RM550.5 billion (up RM9.2 billion or 1.7 per cent MoM.
Kenanga Research said the ringgit had surged in August, becoming the world's best-performing currency with a sharp 6.0 per cent appreciation - the fastest since September 1998, when the local note was pegged to the US dollar.
This was primarily driven by a sharp correction in the US dollar as the US Federal Reserve hinted at a possible rate cut in September amid cooling inflation and a weakening labour market.
"Malaysia's strong growth outlook, stable monetary policy, fiscal reforms, and relative political stability further bolstered the ringgit's performance," it added.
Other ASEAN-5 currencies, Kenanga Research said, also benefited from the US dollar's decline, with the Thsi baht (4.3 per cent) leading the gains, followed by the Infinedian rupiah (3.2 per cent) Philippine peso (2.7 per cent), and Singapore dollar ((2.4 per cent).
Kenanga Research said with inflation subdued and economic growth steady, Bank Negara is expected to maintain its current monetary policy for the next 12-15 months.
However, upside risks to inflation, arising from changes in government policies and external risks, especially geopolitical tensions, remain.
The firm expects the ringgit-dollar pair to trade at 4.52 at year-end (2023: 4.59).
Last Friday's key US jobs data continues to keep the market guessing whether the Fed will cut rate by 25 or 50 bps in September, with the probability of the latter dropping back to 30.0 per cent.
"We have been bullish on the ringgit since last year, forecasting it to reach 4.25/US dollar by end-2024, driven by expectations of US economic weakness and subsequent Fed rate cuts.
"However, emerging signs of a potential soft landing in the US economy suggest the Fed may cut rate by only 50-75 bps this year, rather than the 100-125 bps currently expected by the market.
"This could lead to a US dollar rebound in the fourth quarter of 2024, pushing the ringgit to trade closer to 4.40/US dollar by year-end from around 4.33 currently."