The relationship between the Euro (NYSEARCA:FXE), the U.S. dollar (NYSEARCA:UUP) and the Singapore dollar has been a fascinating one all year. As I've stated in previous articles I am of the opinion that watching just the EUR/USD cross is not enough to understand what is happening behind the scenes of the central bank press conferences and policy statements. QE 3 was announced by the Fed in mid-September right after the ECB announced unlimited if conditional QE to deal with the problems in places like Spain. And yet, nothing changed in the monetary statistics of the Federal Reserve while the conditionality part of the ECB's new policy dominated the proceedings and no new bond buying was actually done.
There was a whole lot of sound and fury and not a lot of action.
Sure there was QE from other central banks, notably Japan -- who are now committing hari kiri with the yen (NYSEARCA:FXY) after relations between them and China deteriorated this past fall undoing their participation in the growing currency bloc that is forming in the ASEAN + Pacific Rim region. And there is no doubt that both the Fed and the ECB are involved with off-balance sheet swaps and other deals to provide liquidity in these markets, but all of that was ostensibly sterilized. In effect, these measures have been the deflationary-bust equivalent of tight monetary policy.
Well, the Fed has finally come out and said it's time to let loose the monetary dogs of war.
What does this have to do with the Singapore dollar? Well, the proof is in the charts. The EUR/USD closed on Friday, December 14th, at $1.3161, the highest weekly close since May 24th. While it did not close above the previous high price set during the week of September 15th -- $1.3171 - it did briefly break that high, creating a high probability setup for the next week to break out above that September high and begin a new trending move higher - with an initial target around $1.35 - which is exactly what it did closing on December 28th at $1.3216. These markets, especially with the amount of central bank intervention going on, are rife with false signals, so that close was not enough to call a breakout on the EUR/USD.
The follow-through action, however, and confirmatory signals from the EUR/SGD and USD/SGD are enough for me to make that call. The EUR/SGD closed at S$1.6051 on December 14th, the highest daily close since June 14th. It was also the highest weekly close since mid-June as well. Since the MAS in Singapore apes the Federal Reserve's interest rate policy they, in effect, inherit the Fed's monetary policy while managing the regional exchange rates as Singapore's economy is more tied to its regional trade than with Western trade. Malaysia is its strongest trading partner, after all and that exchange rate is more important to Singapore's economy. The USD/SGD cross was falling at the time of the breakout. That indicated that the Singapore dollar wass rising versus the U.S. dollar while falling versus the euro. Obviously, a weekly close below S$1.215 on the USD/SGD pair would be very bullish for the Singapore dollar.
I believe what is happening now is the return of capital that fled Europe during most of 2012 to the home land now that it looks like the eurozone is relatively-speaking more stable than the U.S. When the news has been as bad as it has been coming out of Europe, any amount of solid good news will create a rally. This return of some of the fled capital is what is driving the euro higher and has helped to put a price cap on gold (NYSEARCA:GLD) as well. Gold saw a lot of safe-haven buying this year and those that did so when it was trading below $1600 earlier in the year can now exit at a profit. Other factors are weighing on gold but this is one of them. A lot of intraday trading cues in gold have been highly correlated with changes in the euro, if one watches the ticker.
In the end, the Fed wants the dollar to weaken versus the yuan and with it those currencies that are breaking with the dollar reserve system, among them is the Singapore dollar. And this is exactly what is going to happen with this policy. This is supposed to boost exports and stimulate repatriation of capital that has flown overseas in search of cheaper labor. Some of that is occurring, especially in the oil and gas industry. The ECB is farther along that playbook having helped the Greeks, Spanish, Irish and Italians to bankrupt themselves and lower labor rates while ensuring that a majority of the debt is still paid. They call this austerity, by the way. It will be the same in the U.S.
For now, however, the bullish euro trade is on. I would watch for the rally in the EUR/SGD to stop near the S$1.635 to S$1.64 area with this leg of the EUR/USD rally. If the euro has legs to run past $1.35 and the MAS does not materially alter their currency peg to the U.S. dollar then that pair will likely weaken further as the EUR/USD pushes towards $1.40. In summary I would take the following positions:
- Long the CurrencyShares Euro ETF (FXE)
- Short the PowerShares DB US dollar Index ETF (UUP)
- Long the SPDR Gold Trust ETF (GLD) - using short term weakness to buy the dip
- Short the USD /SGD pair on a weekly break of $1.215.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.