Photographer: Bryan van der Beek/Bloomberg

Strategists Play Rupee Via Singapore Dollar as Economies Diverge

  • Morgan Stanley, SocGen and SEB recommending short SGD/INR
  • Goldman Sachs sees rupee outperforming Asian peers in 2017

Go long on the Indian rupee while shorting the Singapore dollar. That’s emerging as one of the favorite trades for 2017 as strategists make a play on the diverging outlook for the two Asian nations.

Less reliance on exports and one of the world’s fastest economic growth rates are seen insulating India from any potential protectionist U.S. policies set forth by the Donald Trump administration. In contrast, trade-dependent Singapore, already under pressure from lower energy prices hurting the oil and gas services sector, may feel more pain.

Morgan Stanley, Societe Generale and Skandinaviska Enskilda Banken AB are among global banks favoring the rupee against the Singapore dollar. An attractive carry, a strong external balance and falling inflation in Asia’s third-largest economy are among reasons Goldman Sachs Group Inc. and Nomura Holdings Inc. say the Indian currency will outperform regional peers.

“The Singapore dollar faces a number of exogenous risks as a highly-open economy,” said Dushyant Padmanabhan, a Singapore-based foreign-exchange strategist at Nomura. “Domestic macro conditions also remain weak.” On the other hand, “India’s high currency reserves and potential central-bank intervention to limit volatility make the rupee less vulnerable on external shocks, of which there are potentially several in 2017.”

The rupee will earn 5.9 percent, including interest, by end-2017, the highest total return in Asia, according to Bloomberg surveys of strategists. The Singapore dollar is seen handing investors a 0.8 percent return in the period.

Three-month implied volatility in the Indian currency, a gauge of expected swings used to price options, has fallen for a third year, slipping 73 basis points in 2016 to 6.02 percent. A similar measure for Singapore’s currency has jumped 52 basis points to 7.32 percent, climbing for a fourth year.

While Prime Minister Narendra Modi’s shock November move to ban high-value currency notes is seen denting consumer demand and weighing on India’s economic growth, analysts expect the impact to be transient. Morgan Stanley predicts expansion of 7.6 percent next year, from an estimated 7.4 percent in 2016, according to a Dec. 8 report.

‘Good Carry’

“The rupee is a ‘good carry’ story with attractive fundamentals, said Kamakshya Trivedi, chief emerging-market macro strategist at Goldman Sachs in London. The nation will have the prospect of improving growth beyond the hit from the note-ban, he said.

Trump’s policies notwithstanding, Asian markets are seen pressured also by the Federal Reserve’s forecast for a steeper path for borrowing costs in 2017. Singapore’s government last month lowered the top end of its 2016 growth forecast to 1.5 percent from 2 percent, while saying the economy will probably avoid a recession.

“This trade will likely work better in a scenario of weaker emerging-market exchange rates, which is our base case over the first quarter of 2017,” said Amit Agrawal, Asia forex strategist at Societe Generale in Bengaluru. That’s because India’s central bank can use its “increased foreign-exchange reserves” to smooth volatility, he said.

Trade Recommendations

  • Morgan Stanley recommends going short the Singapore dollar against the rupee as among its top trades for 2017.
  • Scotiabank anticipates a return of more than 5 percent by buying the rupee versus an equally-weighted basket of the Singapore and Taiwan dollars, shows note dated Dec. 20
  • Goldman Sachs advises buying an equally-weighted basket of the Brazilian real, Russian ruble, Indian rupee and the South African rand, versus selling an equally-weighted basket of Korean won and Singapore dollar as one of its top trades.
  • SEB recommends buying 12-month offshore rupee forwards using Singapore dollar forwards with a 0.0218 target, with spot reference of 0.0210.
Before it's here, it's on the Bloomberg Terminal.
LEARN MORE