FX comment – Limited upside in SGD

by: Roy Teo

Limited upside in SGD
The Singapore dollar (SGD) has strengthened from above 1.44 to below 1.40 against the US dollar since the start of this year. This is mainly driven by a softer US dollar as US economic data have disappointed recently. In our view, we see limited upside in SGD strength for several reasons. The S$NEER is now stronger than when the Monetary Authority of Singapore (MAS) reduced the rate of appreciation of S$NEER on 14 October 2015. Given that global growth concerns have increased since last October, we suspect that further S$NEER strength is likely to challenge the MAS economic growth and inflation outlook. In addition, technical indicators imply that USD/SGD is near oversold territory. While we acknowledge that USD/SGD has broken below the uptrend support channel which began in May 2015, current prices are approaching several key support levels around the 1.3920-1.3940 zone. Last but not least, the options market demand to hedge a weaker SGD against the USD has increased in the past few days. We maintain our view that USD/SGD will head higher over the course of this year. However we acknowledge the risk that it may be lower than our 1.52 year end target if the Fed takes a more cautious approach in tightening monetary policy.