Singapore Dollar Near Record High Puts Heat on MAS to Ease Again

Singapore Dollar Near Record Puts Heat on MAS to Ease
  • ‘Risk of easing in October has increased:’ ABN Amro’s Roy Teo
  • Singapore to be among hardest hit in Asia by Brexit: Nomura

Haven buying of the Singapore dollar amid global market turmoil has pushed a gauge of its strength to unprecedented levels, putting pressure on the city’s central bank to do more to support the economy.

The Monetary Authority of Singapore’s trade-weighted measure of the currency reached a record high after Britain voted to exit the European Union. It has reversed losses incurred after the MAS surprised markets by moving to a neutral policy of zero percent appreciation in April. That’s prompting ABN Amro Bank NV, Royal Bank of Scotland Plc and Nomura Holdings Inc. to predict more easing. The next review is due in October.

While Singapore’s top credit rating and current-account surplus is luring money, along with nations such as Japan and South Korea, the city’s economy is sputtering. Gross domestic product barely grew in the first quarter from the previous three months and the government predicts non-oil exports will shrink this year. Consumer prices have been declining since November 2014 and retail sales, excluding cars, fell in the three months though April.

“The risk of MAS easing in October has increased,” said Roy Teo, a senior currency strategist at ABN Amro in Singapore. “Global GDP will be lower, and this will have repercussions on Singapore’s growth. The Singapore dollar strength against currencies of Singapore’s main trading partners poses a strong downside risk to export and inflation forecasts.”

Currency Strength

As of 1:11 p.m. in Singapore on Friday the local currency had advanced against 11 of its 16 major peers since the June 23 U.K. referendum, with the biggest gain of about 14 percent against the British pound and 4 percent against the Swedish krona. It lost 6.2 percent against the Japanese yen and 1 percent versus the New Zealand dollar.

For a Gadfly column on the risks posed by Singapore dollar’s strength, click here.

April’s move was the MAS’s second unexpected decision in less than 16 months, following an emergency policy change in January last year to combat the threat of deflation. The last time the central bank shifted its currency policy to zero appreciation was in October 2008, when Singapore’s economy was in a recession.

The authority guides the local dollar against an undisclosed basket of Singapore’s trade partners and competitors. It intervenes in the market to keep the exchange rate within an unspecified band and changes the slope, width and center of that band when it wants to adjust the pace of appreciation or depreciation of the currency. Nomura, ABN Amro and RBS expect the MAS to lower the midpoint of the band.

For an explainer on how the MAS conducts monetary policy, click here.

Growth Outlook

Nomura cut its 2016 growth estimate for Asia to 5.6 percent from 5.9 percent on June 24, saying Brexit’s global impact shouldn’t be underestimated given the U.K.’s position as a financial hub, and the risk of more countries leaving the EU. Singapore and Hong Kong’s economies will be among the hardest hit given their very open nature, according to Rob Subbaraman, chief economist for Asia ex-Japan at the brokerage.

Singapore’s government in May maintained its 2016 GDP growth forecast of 1 percent to 3 percent. That’s less than the 3.5 percent average expansion in the preceding five years. It projected a decline in non-oil domestic exports of 3 percent to 5 percent this year, compared with a February projection of a zero to 2 percent increase. The MAS in June predicted inflation will average between minus 1 percent and 0 percent, compared with minus 0.5 percent in 2015.

The local dollar has appreciated 5.1 percent to 1.3496 against the greenback this year, the third-best performance in Asia. The currency will weaken to S$1.40 by end-2016, according to the median estimate of analysts in a Bloomberg survey.

‘Immediately Intervene’

Standard Chartered Plc expects the MAS to maintain its current monetary policy setting in October, with its Singapore-based currency strategist Divya Devesh saying 2016 growth would need to drop below 1 percent to trigger further easing. Australia & New Zealand Banking Group Ltd. estimates the Singapore dollar is trading on the strong side of the midpoint of the MAS’s policy band, which could complicate any potential easing.

“To re-center when the Singapore dollar’s NEER is this high would require MAS to immediately intervene to weaken the currency,” said Khoon Goh, ANZ’s head of Asia research in Singapore. “While the economic outlook is uncertain, it’s not clear whether there will be large downside adjustments to Singapore’s growth and inflation.”

The city-state’s GDP probably expanded an annualized 1.2 percent in the second quarter from the previous three months, according to the median estimate of economists surveyed before preliminary figures due July 14. That would be faster than 0.2 percent in the first quarter.

“There’s a reasonable possibility the MAS moves in October,” said Vaninder Singh, a Singapore-based economist at RBS. “We will get an indication before the event. You’ll see the MAS push the NEER to the lower side of the band, and that will be a clear indication that something might be coming.”

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