FX Watch – SGD – Further easing on cards

by: Roy Teo

FX-watch-SGD-Further-easing-on-cards-Feb-15.pdf ()

We have downgraded our Singapore dollar (SGD) forecasts as we expect the Monetary Authority of Singapore to re-centre the exchange rate policy band downwards, but maintain a slow and gradual appreciation of S$NEER in April. Our bearish view is due to a lower core inflation outlook in the near term. However, we expect a recovery in economic growth and higher inflationary pressures in the second half of this year.

USD/SGD to rise to 1.40 by end 2015

We have become more bearish on the Singapore dollar (SGD) as we expect the Monetary Authority of Singapore (MAS) to further ease monetary policy at the next meeting in April. We now expect the SGD to move lower versus the US dollar  towards 1.40 by the end of this year, compared to our previous forecast of 1.37.

 Implications of the unscheduled easing on 28 January

The MAS surprised financial markets, including us, when it announced a modest easing bias in an unscheduled monetary policy meeting on 28 January. In our recent FX Watch “Disinflation to weigh on Asian FX’, we had already signalled that we saw a case for the MAS to slow the pace of appreciation in the S$NEER. We had expected this step only in the next scheduled monetary policy meeting next April. We applaud the central bank’s timely move to provide clarity to the market (as market speculation of an easing bias had been increasing). In addition this signals that a slower pace of appreciation in the S$NEER is necessary given the disinflationary impact from lower energy prices. However, we think that there is more to that.


 MAS to re-centre the exchange rate policy band lower…

We expect the MAS to re-centre the exchange rate policy band downwards in April for several reasons. Core inflation in 2015 has been downgraded substantially from 2-3% to 0.5-1.5%, the lowest level since early 2010.  In fact core inflation could come in lower than 0.5% in the coming months (see graph below). As such we expect the S$NEER to trade lower towards the lower end of policy band in the coming months. By re-centering the policy band lower, the MAS is not obliged to intervene in the currency market to defend weakness in the SGD.


The strength in the S$NEER has also pushed imported price index (imported inflation) to the lowest level since 2009. We think that if the MAS had not shifted to an easing bias on 28 January but had announced both a downward shift in the policy band and a slower pace of gradual appreciation of S$NEER in April, this might have resulted in a sharp depreciation of the exchange rate, which is not desired.


…but maintain gradual appreciation of the S$NEER

Given Singapore’s open economy, core inflation is expected to gradually rise as both energy prices recover and global growth accelerates later this year. Hence a more gradual appreciation of the S$NEER to curb imported inflation remains necessary.