FX Convictions – Long USD/SGD stop loss hit

by: Roy Teo

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In this publication: Long USD versus SGD: stop loss at 1.3950 triggered. Stronger SGD towards 1.38 in the short term, weaker SGD still likely later this year

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Long USD versus SGD: stop loss at 1.3950 triggered

On 19 January 2017, we initiated our bullish view on the US dollar versus the Singapore dollar. Our stop loss at 1.3950 was triggered earlier today as sentiment in the US dollar deteriorated further. The failure to scrap the Affordable Care Act after replacement legislation was withdrawn on Friday due to a lack of support weighed on the dollar. This triggered market expectations that US President Donald Trump’s tax reform/fiscal stimulus will be delayed and/or be smaller than initially expected. The total return on the long US dollar versus Singapore dollar was -2.35%.

Earlier this month, the FOMC maintained their three rate hike projections this year after raising the Fed funds rate by 25bp as expected. The US dollar fell given market expectations that the FOMC will either raise their rate hike projections and/or signal that future rate hikes will be sooner than later.

Domestically in Singapore, economic growth in the last quarter of 2016 was revised higher from 9.1% qoq saar to 12.3%. Exports and inflation continued to show a gradual improvement in the first two months of 2017, in line with trends in the region as a whole. Nevertheless, economic growth in the first quarter of this year is likely to reflect a more modest expansion compared to the previous quarter. We expect the Monetary Authority of Singapore (MAS) to maintain their S$NEER policy in next month’s semi-annual monetary policy review. Our view is in line with market consensus. This is also consistent with market pricing given that the S$NEER is estimated to be around the mid-point of the policy band. In the short term, there is downside risk for the SGD to strengthen towards 1.38 against the US dollar. Looking ahead, we expect the SGD to depreciate moderately towards 1.43 against the US dollar later this year as yields in the US firms. We expect core inflation in Singapore to remain subdued given the soft labor market and subdued economic growth outlook. Hence it is unlikely that the MAS will turn hawkish anytime soon.