Singapore Dollar Will Continue Strengthening


Despite recent low inflation, Monetary Authority of Singapore still foresees inflation risks due to wage pressures.

Monetary Authority of Singapore policy announcement next week will keep current policy of "moderate and gradual appreciation".

USD/SGD will move to 1.23 or 1.22 in the next few months.

In my February article on the Singapore dollar (NYSEARCA:FXSG) I predicted (reluctantly) "approximately 1.25 by April, all else equal" due to the drift of the Singapore exchange rate band and "1.24 by end of May, possibly sooner". The last week has managed to save the first part of the prediction, and now I'm feeling more confident about the second part. If you had bought SGD on the day of publication, you'd be up 230pips and if you'd be patient and bought at the spike after the last Fed meeting, you'd be up 300pips.

Click to enlarge

Since the last article Chair Yellen has run her first meeting and press conference (turns out running the meeting is the Chair's main power). The Monetary Authority of Singapore (here after MAS - the Singapore central Bank) has released its summary of recent economic developments and the most recent inflation report. Looking at Singapore data now is timely as the MAS policy statement will be released next week - probably 14th or 15th of April.

As background, The Monetary Authority of Singapore (MAS - the Singapore central bank) does not target domestic interest rates; instead it targets a crawling band for the SGD exchange rate against a basket of currencies. Thus predicting USD/SGD is essentially an exercise in putting numbers to MAS's targeted exchange band.

MAS states that it targets a trade-weighted basket of currencies in computing its nominal effective exchange rate index, referred to as the NEER. I've continue to model this basket using: USD 22.5%, Malaysian ringgit 12%, yen and renminbi each 11%, euro 10.5%, Taiwanese dollar and baht each 6%, pound sterling and Indonesian Rupiah each 5%, Korean won 4%, Philippines and Aussie at 3% and finally rupees at 1% (see the previous article for how I got to those numbers). Below is the updated graph showing the model (in grey) against the published NEER (in blue) from mid-2012 until the first week up April 2014:

Click to enlarge

I have adjusted the green line - my estimate of the center of the band - downwards slightly from before, reflecting previous policy statements more closely. Along with that I've expanded what I think the band range is to ±2%. The current slope is still approximately 2.5% per year.

The economy developments and inflation reports strongly telegraph what next week's policy decision will be. The last quarter of 2013 was relatively good. Whole year GDP growth came in at 4%. Electronics manufacturing did particularly well and the financial sector continues to be strong. The government fiscal surplus came in higher than expected. Next year's fiscal policy will spend some, but not all, of the surprise portion of the surplus. Estimates are for 2-4% GDP growth in 2014.

The current account continues to be positive. The emerging market 'correction' in 2013 sucked a lot of portfolio investment out of Singapore, but the net balance of payments was still positive and the official foreign reserves continue to grow.

Inflation in February was quite low - 0.4% for CPI and 1.6% for MAS's core inflation measure. However, the report goes to great pains to explain that this is mostly due to very high inflation in February of last year. All of 2012 and the beginning of 2013 had very high housing and especially car price inflation. Borrowing regulations cut those dramatically and so CPI inflation relative to the beginning of 2013 is misleadingly low. The report also indicates a drop in food prices (as they serious? Everywhere I eat has gone up in price). Despite the apparent disinflation, the reports go to great pains to stress that MAS continues to expect employment and wages - resident inflation is under 4% - to lift prices, predicting 2-3% inflation in 2014.

The amount of effort these reports make to promote inflation risk despite any contrary evidence, plus the prediction of firm growth foretell what MAS's next monetary policy statement will be. The reports are using the same wordings as the last statement, so I predict the policy statement next week will say exactly the same thing as last October's statement: same SGD appreciation rate, same exchange rate band width, same everything.

As I've mentioned previously - it's still strange when Fed rate announcements affect USD/SGD exchange since Singapore interest rates follow Fed rates due to interest rate parity. I suspect the MAS announcement will solidify the commitment that Fed rate changes will not weaken MAS's policy position. So I have somewhat more confidence that the Singapore dollar will appreciate in the near term. I expect USD/SGD to go to

For investors in Singapore stocks (NYSEARCA:EWS) and small caps , now is a reasonable entry time. Singapore stocks are beginning to recover again and currency appreciation is more likely than not.

Disclosure: I am long EWS and Singapore Dollars. 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.