Singapore dollar shows resilience against the greenback

The local currency has been pretty resilient this week against the US dollar which continues to be the big winner from the eurozone crisis, says IG Markets Singapore.

IG Markets Singapore said:

The Singapore dollar has been pretty resilient this week against the greenback which continues to be the big winner from the eurozone crisis.

Yesterday the central banks of China, the UK and Europe decided to ease monetary policy which saw a busy day for currency traders.

But it did little to change the USD/SGD pairing which trades this morning at $1.2671.

The US has soared against the euro and saw big inflows last night. It also benefitted from better-than-expected jobs data from the ADP report.

This has raised expectations for a good print from tonight’s non-farm payrolls data and would reduce the chances of QE3 being introduced by the Fed.

BK Asset Management meanwhile noted (for 5 July 2012 trading):

It has certainly been an exciting day in the foreign exchange market thanks to the stimulative actions of central banks around the world.

While the European Central Bank and the People's Bank of China's decisions to cut interest rates were the biggest news of the day, it is also worth mentioning that the Bank of England increased asset purchases AND that Denmark's central bank cut its short term certificates of deposits (CD) rate to negative 0.2 percent. This historic step for the central bank illustrates their commitment to fighting further gains in its currency.

Throughout Europe's sovereign debt crisis, investors have turned to the Krone for safety and today's action by the Danish central bank helped erase the currency's year to date gains against the euro. The reason why we point this out is to show that central banks around the world took aggressive steps to stimulate their local economies today and eventually this should bode well for the global economy.

However, the equity markets were not impressed. Rate cuts are generally positive for equities and the action of 4 central banks today should have driven stocks sharply higher. Yet instead of rallying, the S&P 500 ended the day virtually unchanged from Thursday's levels.

While some could attribute the lack of a rally in U.S. stocks to the lack participation by U.S. traders still on holiday, the German DAX and the French CAC also ended the day lower. Equities did not respond positively to the easing because of the fear that the European and Chinese central banks have instilled on investors.

ECB President Draghi sounded extremely pessimistic about the outlook for the Eurozone economy while the PBoC's surprise rate cut made everyone wonder if the Chinese economy is doing worse than what is indicated in official releases. If so, then we have a lot to be worried about beyond today's interest rates cuts.

RBS, on the other hand, noted (for 5 July 2012 trading):

Three central banks eased policy today (PBOC, BoE, and ECB) yet risk oriented assets that may benefit from the added liquidity did not strengthen noticeably today.

At the same time, a number of US data releases were broadly positive on the employment front ahead of the June employment report tomorrow: initial jobless claims, the ADP employment estimate, and the ISM employment figure were all fairly positive, with the ADP estimate of +176K private payroll gain being perhaps the most positive.

Ahead today, key data include the US employment report and Swiss FX reserves and CPI. Switzerland CPI may dip further into deflationary territory and June FX reserves should indicate how actively the SNB defended the 1.20 floor in EUR/CHF.

Valuation effects alone should shave 3bn off of total reserves, meaning a print well above 300.8bn may indicate active intervention. As for US employment, we expect US non-farm payrolls to rise 110K, a result which may please no-one: the number may not be low enough to lead markets to price in QE any further but at the same time employment growth of 110K would not likely significantly improve the US economic outlook.

We are particularly wary of the 3-month moving average of employment gains, currently 96.3K. If the average remains below 100K, this could increase the odds of QE3, which we expect would lead to USD weakness. More broadly, we expect the Fed to embark on further unsterilized asset purchases during 3Q 2012, which we expect will weaken the USD over the next few months.

Finally, we expect the BoE's expansion of QE to weigh on the GBP. According to our econometric work, a £50bn increase in asset purchases that is left unsterilized (and hence leads to a one-for-one expansion of the BoE balance sheet), lowers GBP/USD fair value by around 1.5 cents. Our models indicate potential weakness for GBP versus the EUR as well.