Bank Negara Malaysia (BNM) reported a significant increase in international reserves, which rose by USD2.1 billion or 1.9% month-on-month to reach USD116.8 billion as of 30 August 2024. This marks the highest level since December 2021.

Despite this positive development, Kenanga says the reserve adequacy in terms of import coverage fell slightly to 5.4 months from 5.5 months in July, likely due to a surge in imports. Additionally, reserves are now just adequate to cover 1.0 times the total short-term external debt, meeting the IMF's minimum recommended adequacy level.

The increase in reserves was primarily driven by a sharp rise in foreign currency reserves, which grew by USD2.1 billion or 2.0% month-on-month to USD104.5 billion. This increase, which represents nearly a decade-high, was supported by substantial capital inflows amounting to RM11.5 billion into the capital market, alongside potentially higher repatriation of export earnings and foreign direct investment. Notably, BNM's net foreign exchange (FX) reserves increased for the third consecutive month, reaching USD59.3 billion in July, up from USD59.1 billion in June.

However, BNM's short position in FX swaps surged to a record high of USD29.3 billion, indicating continued intervention by the central bank. Other reserve assets, including gold, special drawing rights, and IMF reserve positions, remained relatively stable.

In ringgit terms, BNM reserves reached a record high of RM550.5 billion, up RM9.2 billion or 1.7% month-on-month. The ringgit surged by 6.0% in August, becoming the world's best-performing currency for the month. This sharp appreciation was driven by a significant correction in the USD, as the 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 supported the ringgit's performance.

Regional currencies also benefited from the USD's decline, with ASEAN-5 currencies gaining ground. The Thai baht led with a 4.3% increase, followed by the Indonesian rupiah (3.2%), Philippine peso (2.7%), and Singapore dollar (2.4%). The USD index fell to an average of 102.5 in August, its lowest level in over a year, driven by growing expectations of multiple Fed rate cuts and a risk-on sentiment that fuelled demand for emerging market assets.

Looking ahead, BNM is expected to maintain its current monetary policy settings amidst stable inflation and growth prospects. However, potential upside risks to inflation, stemming from changes in government policies and external geopolitical tensions, could prompt the central bank to remain vigilant. The year-end forecast for the USDMYR exchange rate is around 4.42, with the ringgit anticipated to trade closer to 4.40/USD by year-end, reflecting emerging signs of a soft landing in the US economy and potential market adjustments.