FX comment – SGD strengthens after the MAS left monetary policy unchanged

by: Roy Teo

  • Singapore 2015 Q1 GDP beats market expectations
  • MAS maintains monetary policy stance
  • Fade the SGD rally towards 1.3450 for 1.40 year end target

Singapore GDP grew 2.1% in 2015 Q1, beating market expectations of 1.7%

Based on advance estimates, the Singapore economy grew by 2.1% yoy in the first quarter of 2015. The service and construction sectors continued to expand while the manufacturing sectors contracted. Growth in the construction sector was driven by a pick up in private sector construction activities. The service sector was also supported by wholesale and retail trade and business services. On the other hand, the manufacturing sector was weighed due to a fall in output in the transport engineering, electronics and precision engineering clusters.

MAS maintains monetary policy stance

The Monetary Authority of Singapore (MAS) decided to maintain the policy of a modest and gradual appreciation of the S$NEER policy band this morning. There will also not be any change to the slope and width of the policy band and the level at which it is centred. The MAS economic and inflation outlook remains unchanged from its January assessment. The Singapore economy is projected to expand 2 to 4% yoy in 2015. Headline inflation is projected at -0.5% to 0.5% while core inflation is expected to be at 0.5-1.5%. The domestic oriented sectors should continue to expand while a sustained but uneven recovery in the global economy should provide a mild uplift to the external oriented sectors in Singapore. We think that the MAS has chosen to keep its powder dry today as the economy expanded at a stronger pace than market consensus. In addition, Brent crude oil prices have trended higher since January, rising 20% to USD 58 a barrel. Furthermore, the S$NEER has also strengthened recently, putting less pressure for the MAS to ease policy today. Looking ahead, we do not rule out an unscheduled monetary policy easing before October (the next semi-annual monetary policy meeting) should crude oil prices start to trend lower resulting in core inflation declining below the MAS estimates.

Fade the SGD rally towards 1.3450 for 1.40 year end target

Due to market speculation that the MAS may further ease monetary policy today, the Singapore dollar (SGD) appreciated by almost 1% to below 1.3620 after the surprise announcement. Though short term technical indicators imply that the SGD is in near overbought territory, further unwinding of SGD short positions could push prices towards 1.3525. In the medium term, we continue to favour fading any gains in the SGD towards 1.3450 for a year end target of 1.40 against the US dollar (USD). As we expect both the Euro and Japanese yen (both constituting almost 25% of SGD trade weights)  to depreciate against the USD, the S$NEER is projected to extend its gains should the SGD remain resilient against the USD and other Asian currencies. This will result in further downward pressure on import prices and weigh on export price competitiveness. Last but not least, financial markets are underestimating the pace of rate hikes in the US this year in our view. This will provide further support for the USD to strengthen towards 1.40 against the SGD later this year.