KUALA LUMPUR (July 3): RHB Investment Bank said Bank Negara Malaysia’s (BNM) foreign exchange (FX) reserves could fall to around US$109 billion (RM508.7 billion) within the next three months from the May 31, 2023 level of US$112.7  billion, as BNM continues to use the FX intervention policy tool to stabilise USDMYR.

In a Global Economics & Market Strategy note on Monday (July 3), RHB Banking Group chief economist and head of financial market research Sailesh Kumar Jha said that ultimately, FX intervention is unlikely to have a sustained durable impact on the path of USDMYR and from his reading of BNM, its view on the global economy is in line with the consensus view of a challenging environment for the world in 2H2023, versus RHB IB’s view that the US and global economy are likely to recover by summer 2023.

On June 27, BNM issued a statement saying it would intervene in the foreign exchange market to stem currency movements deemed excessive, following a meeting by its Financial Markets Committee to discuss developments in financial markets affecting the ringgit's exchange rate.

According to the FMC, the external environment continues to be the main factor affecting the ringgit, particularly the evolving market expectation of higher terminal interest rates in most major economies, which in turn raises the risks of a possible marked slowdown in the global economy. Further, against the backdrop of the US dollar's strength, the FMC had noted that the extent of the ringgit’s recent depreciation is not reflective of Malaysia’s economic fundamentals.

At the point of writing, the ringgit was trading at 4.6670 against the ringgit. Year to date, it has weakened near 6% against the greenback.

Meanwhile, Jha said BNM is expected keep the overnight policy interest rate (OPR) unchanged at 3.0% with a neutral guidance at its monetary policy committee (MPC) meeting on July 6.

“In our previous assessment, we had indicated a 25bps hike of the OPR on July 6.

“The Bloomberg consensus estimate is for the BNM to be on hold on July 6. We maintain our peak OPR forecast of 3.25% in 2023,” he said.

Jha said the bottom line is that the longer BNM delays hiking the OPR to higher levels, negative carry against the US dollar is likely to continue to rise as the US Federal Reserve Bank’s Federal Funds Rate accelerates to a peak of 5.50-5.75%. With the balance of risks tilted towards a print of 5.75-6.00%, significant domestic fiscal reforms are unlikely to materialise in 2H2023.

He added that with external vulnerability indicators already flashing red and USDCNH from a balance of risk perspective printing 7.30-7.40 in 4Q2023, the central bank will increasingly need to engage in an interest rate defence of the currency in the future.