Singapore dollar dips 0.2% against the greenback

The local currency’s resilience amidst global headwinds and other currencies’ weakness is forecast to encourage policy change.

IG Markets Singapore said:

The theme for FX markets on Tuesday was risk off with USD and JPY gaining across the board.

Given the mood the Singapore dollar showed relative resilience, only falling 0.2% against the greenback to trade just above 1.23.

The risk-off mood was catalysed by global growth concerns, where analysts were especially downbeat on China’s prospects, and then accelerated by the ever present concerns surrounding the on-going eurozone saga.

The resilience shown in SGD in the face of the global headwinds and weakness shown in other currencies is likely to encourage the MAS to act at their latest policy meeting at the end of the week.

It is likely the central bank will announce measures including decreasing the slope of its permitted trading band as it tries to implement measures to help the economy grow. The export-dominated economy will welcome these moves as a weaker currency could help to encourage more business through the island state.

It will be interesting to see if we get an increase in volatility in the build-up to this policy meeting, especially as the expectation is for a change in policy this time round.

DBS Group Research meanwhile noted:

Risk reward sees limited downside for USD/SGD, and favors more upside instead. USD/SGD has been in a descending price channel after it suffered its worst ever one-month sell-off in September 2011 when the Eurozone crisis went global. Like the start of the year, USD/SGD trended lower from the ceiling to the floor of this channel from the start of June to mid-September.

Both moves were inspired by market rallies from the European Central Bank (ECB) taking measures to mitigate the tail risks of a break-up in the single market. The start of the year rally was inspired by the ECB’s Long Term Refinancing Operations (LTROs) and the latest by the Outright Monetary Transactions (OMT) Scheme.

Both measures were targeted at keeping down the borrowing costs of struggling EU countries at sustainable levels. Likewise, bounces in USD/SGD from the floor to the ceiling of the channel were linked to disappointments over Eurozone efforts to resolve the crisis.

Yesterday, the International Monetary Fund (IMF) Global Financial Stability Report warned that that the tail risks have not disappeared, and that inaction by Eurozone leaders could lead imperil the financial system and result in another global recession yet again.

Stocks closed lower, and the US dollar renewed its safe haven appeal. From February to mid-April, USD/SGD did not rise back into the upper half of the channel. One reason was the expectation for the Monetary Authority of Singapore (MAS) to steepen the slope of its Singapore dollar nominal effective exchange rate (SGD NEER) policy band to fight inflation at the last April policy review.

The MAS did increase the appreciation pace to 3% a year from 2% because inflation stayed stubbornly high above 5.0% YoY in the four months ending June. This Friday, we expect the MAS to moderate the appreciation pace of the policy band back to 2% a year.

Inflation fell to 4.0% and 3.9% in July and August respectively. More importantly, the weaknesses in both the manufacturing and exports sectors in the first two months of 3Q12 signaled a technical recession for the quarter.

Looking ahead, worries that Eurozone may once again disappoint have emerged. Unlike April, Singapore is looking to flatten and not steepen its exchange rate policy band. This suggests scope for USD/SGD to move back up into the upper half of its descending price channel in the weeks ahead, which is estimated to be between 1.2470 and 1.2790 as of this morning.