Singapore dollar trades at $1.245

The local currency could face further pressure after revised Q2 GDP figures were released, says IG Markets Singapore.

IG Markets Singapore said:

The Singapore dollar ends the week losing slight ground to the greenback after edging up for most of the week on the tide of fresh optimism.

This morning the local currency trades at $1.245 having slipped above the $1.24 level. It could face further pressure after Singapore revised Q2 GDP figures were released this morning.

They show the economy still shrank last quarter, compared to Q1, but only by 0.7% not the 1.1% reduction that was previously reported.

While GDP for the year was tightened to 1.5% to 2.5%, there is unlikely to be a change in monetary policy from the Monetary Authority of Singapore (MAS).

On the other side of the currency pair, the dollar has been strengthening against major currencies with some positive jobs data out of the US last night.

DBS Group Research meanwhile noted:

We have seen three “narrowings” in Singapore. At the last monetary policy review in April, the Singapore dollar nominal effective exchange rate (SGD NEER) policy band was narrowed. According to our in-house model, the band was compressed to ±2% around its mid-point from ±3% previously.

The official 2012 inflation forecast was narrowed to 4.0-4.5%; it was previously revised up to 3.5-4.5% from 2.5-3.5% at the April policy review. The official economic growth forecast for 2.12 was compressed to 1.5-2.5% this week from 1-3%.

This morning, final GDP for 2Q12 was revised up to an annualized -0.7% QoQ from the previous - 1.1% advance estimate. Market was still disappointed because it was expecting an upgrade of +0.5%.

Overall, inflation has remained stubbornly high amidst disappointing growth, with an exchange rate that is still strong near record high levels against the US dollar. Historically, real GDP had eventually headed into negative territory in year-on-year terms after real GDP growth fell below headline CPI inflation.

Admittedly, this was easier to achieve during the Asian crisis and the global tech recession because of low inflation. Today, inflation is higher. As witnessed last September, the risk for a higher USD/SGD comes in when growth falls short of the official growth forecast.

On a positive note, the Ministry of Trade of Industry said this morning that it does not expect Singapore to head into a technical recession.