Singapore Seen Allowing Stronger Currency: Asean Credit

The Monetary Authority of Singapore will probably keep favoring modest currency gains as it seeks to curb inflation while supporting economic growth.

All 23 analysts polled by Bloomberg News say the MAS, which uses the exchange rate rather than borrowing costs as its main policy tool, will let the Singapore dollar stay on a “modest and gradual” appreciation path. Gross domestic product probably slowed to an annualized 0.6 percent last quarter from 6.1 percent in the three months through December, a separate survey showed. The decision and the data are due April 14.

Support for the Singapore dollar’s appreciation bodes well for the bond market, after the best quarter of returns for sovereign debt since 2012 and the busiest corporate issuance in six quarters. An export rebound leaves the central bank room to focus on reining in core inflation, which it sees averaging as much as 3 percent this year as a labor shortage drives up wages.

“The external side of things is still pretty positive for Singapore,” Dominic Bunning, Hong Kong-based senior Asian currency strategist at HSBC Holdings Plc, said in an April 4 phone interview. “The inflation risk is still slightly to the upside for the MAS, and that’s why they’ll keep the currency appreciation stance.”

Debt Returns

HSBC predicts the Singapore dollar will trade at S$1.27 versus its U.S. peer by June 30, down 0.8 percent from S$1.2593 as of 12:24 p.m. local time, matching the median of 18 forecasts in the survey for the policy decision. That compares with predicted declines of more than 1 percent for the Thai baht and Malaysian ringgit, according to separate Bloomberg polls.

The MAS adjusts the Singapore dollar’s pace of appreciation or depreciation against an undisclosed trade-weighted basket of currencies by changing the slope, width and center of the band. A steeper slope allows faster gains or appreciation over time. DBS Group Holdings Ltd. said there’s a “good chance” officials will widen the currency’s trading band, while the rest see no change to current settings.

Sovereign debt of Singapore returned 0.7 percent in the three months ended March, the most since the fourth quarter of 2012, according to data from Bank of America Merrill Lynch index. That compares with 1.2 percent for Malaysia and 2.3 percent for Thailand.

Singapore dollar-denominated bond offerings rose 24 percent last quarter from the final three months of 2013 to S$6.4 billion ($5.1 billion), while local-currency note sales in the Association of Southeast Asian nations region slid 12 percent to $18.4 billion, data compiled by Bloomberg show.

Global Growth

Trade-dependent Singapore may benefit from an improving outlook for global expansion. The Asian Development Bank forecasts Southeast Asian growth to accelerate to 5.4 percent in 2015 from 5 percent this year, according to an April 1 report. The U.S., euro area and Japan will collectively grow 2.2 percent next year from 1.9 percent in 2014, the ADB said.

Singapore’s industrial output rose in February at the fastest pace since 2011, while non-oil domestic exports growth climbed the most in two years, official data showed last month.

Escalating living costs, rising wages and curbs on foreign workers remain threats to Singapore’s growth. Finance Minister Tharman Shanmugaratnam said in his budget speech in February companies need to improve the way they do business to sustain wage increases while keeping the economy competitive.

“If Singapore would like to benefit more from the expected pickup in external demand, it needs to be competitive, and a stable or slightly weaker currency will help them with that,” Frances Cheung, Hong Kong-based head of Asian rates strategy at Credit Agricole CIB, said in an April 3 phone interview. “At the same time, keeping the current stance of policy would also help manage inflation expectations.”

Inflation Risk

Government data last month showed Singapore’s consumer prices climbed 0.4 percent in February from a year earlier, the slowest pace in four years. Vehicle-permit prices saw their biggest decline since January 2009 and home prices fell for a second-straight quarter, according to separate reports.

The nation’s inflation rate will probably quicken to 2.8 percent this year, according to a quarterly MAS survey of 22 economists and analysts released last month.

“There’s still a risk that you see inflation pressures trend back up, particularly given that most of the move down in inflation has been off the back of housing and car prices, which may ultimately prove to be temporary,” Jonathan Cavenagh, a Singapore-based currency strategist at Westpac Banking Corp., said by phone on April 3.

Labor Shortage

Policy makers are watching for any impact on prices from a shortage in labor, as the government tightens rules for companies hiring foreign workers. The next round of measures is scheduled to take effect July 1.

“Domestic costs could pass through more significantly to prices of consumer services as firms face rising cost pressures from higher wages,” Singapore’s central bank and trade ministry said in a March 24 report. The core inflation measure, which excludes private transport and accommodation costs, may rise “over the next few quarters” and average 2 percent to 3 percent this year, according to the report.

Officials last adjusted monetary policy at the April 2012 review, when they restored a narrower band and increased its slope, saying it would “help anchor inflation expectations, ensure medium-term price stability, and keep growth on a sustainable path.”

The MAS may widen the currency’s trading band, reflecting “increasing confidence” in the global recovery, DBS economist Irvin Seah said in an April 2 phone interview. It’s “a policy that will be able to adapt to these new economic conditions.”

Company              Policy          Mid-’14       End-’14
ANZ:                 No change       1.28          1.30
BAML:                No change       1.26          1.27
Barclays:            No change       1.28 (3m)     1.27 (6m)
BNP:                 No change       1.28          1.30
CBA:                 No change       1.27          1.25
Citi:                No change       1.27 (3m)     1.30 (6-12m)
Commerzbank:         No change       1.29          1.34
Credit Agricole:     No change       1.27          1.28
Credit Suisse:       No change       1.27 (3m)     1.28 (12m)
Deutsche:            No change       1.29 (3m)     1.27 (6m)
DBS:                 Widen band      1.22          1.20
Goldman:             No change       ----          ----
HSBC:                No change       1.27          1.28
ING:                 No change       1.267         1.267
JPMorgan:            No change       1.28          1.29
Maybank:             No change       1.275         1.258
Mizuho:              No change       1.24          1.23
Nomura:              No change       1.29          1.31
OCBC:                No change       1.254         1.273
RBS:                 No change       1.24          1.21
Stanchart:           No change       1.32          1.28
UOB:                 No change       1.29          1.33
Westpac:             No change       1.27          1.24
Median:                              1.27          1.2765
Respondents: 23
NOTE: Forecasts by Barclays, Citi, Credit Suisse and Deutsche
are excluded from median calculations
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