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Summary

  • Monetary Authority of Singapore will continue policy of appreciation for Singapore dollar.
  • Recent climb in USD/SGD exchange provides an opportunity.
  • USD/SGD could move to 1.22 in next few months; shorting euro/sgd may be even better.

In my February article on the Singapore dollar (NYSEARCA:FXSG) I predicted "approximately 1.25 by April - which we got - and "1.24 by end of May, possibly sooner" - which we didn't get… until July. In my April article my forecast statement didn't actually get finished, but I did expect a further drop in USD/SGD which did not happen - score that as a miss.

(click to enlarge)

The recent move up appears to be mostly driven by the "good" news in US macroeconomic reports (jobs, etc) and corresponding expectations for an earlier rate raise. SGD exchange rates versus other large trading partners (Malaysia, Japan, China, Europe) have shown no change or an equivalent change. Thus we can conclude that the recent weakness in SGD is primarily about the USD / SGD rate. This is always a bit odd, since SGD interest rates follow the US dollar rates, but Mr. Market seems to take a blanket approach against all currencies in these cases.

As reminder, The Monetary Authority of Singapore (MAS - the Singapore central bank) targets a crawling band for the SGD exchange rate against a basket of currencies. Thus predicting USD/SGD long term requires guessing MAS's reaction function (which is published here and can be estimated with history). Near term predictions are an exercise in putting numbers to MAS's targeted exchange band.

Since the last article the Monetary Authority of Singapore (here after MAS - the Singapore central Bank) has more inflation reports. The current monetary policy ("moderate and gradual appreciation") appears to be keeping core inflation where MAS wants it. The 'cooling measures' and the total debt servicing ratio (TDSR) macro-prudential policies have started to bite this year to get non-core items (housing and cars) under control. The report notes that the labor market is likely to keep inflation "elevated at 2-3% in 2014". MAS is screaming loud and clear that the current policy of appreciation will continue through the October meeting at the least.

As mentioned, MAS states that it targets a trade-weighted basket of currencies in computing its nominal effective exchange rate index (NEER). The February article explains how I arrived at weightings in the basket. I noticed that over the last few months there was a gradual trend towards underestimating, so I experimented until I found a better fit and no trending. This was achieved with very slight reductions in weights to Aussie, Bhat, Taiwan dollar, and Pound with slight increases to Rupee, Ringgit, and Yuan.

Below is the updated graph showing the model (in grey) against the published NEER (in blue) from beginning of this year until the first week of August 2014:

(click to enlarge)

Note that in March SGD was at it's weakest point and peaked about two weeks ago. That represented about 350 pips on USD / SGD. In February I suggested that EUR / SGD could be even more profitable, and that turned out accurate with a 900 pip move. The last two weeks have shown a noticeable drop, driven by the over 100 pip change in USD / SGD.

The recent move in USD / SGD, with little change in other rates creates a bit of an opportunity. While the SGD NEER has not yet hit what I believe is the midpoint, I suspect that the likely moves are upwards. For more than two years the rate has stayed in the upper half of the band and I suspect that MAS, or Mr. Market, is treating the midpoint as a soft limit. Certainly, MAS would prefer not to see the inflation effects of dropping to the of the official band and probably does not want the volatility either. The historical series also shows the NEER 'bouncing off' the midpoint reliably. Thus I think the current downside is very limited, and upside could be as much as 300 pips. While I hate to make predictions with the NEER officially in the middle of the band, I'll continue my tradition of trying. I'm estimating USD/SGD of 1.21 by end November. And nearer term I'm hoping for 1.26 this month as an entry point.

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

I've also started to think about the long term trend - what happens when the Fed starts to raise rates sometime next year? Mostly this will be good for Singapore as it would imply a strong US economy and Singapore exports to the US. As exports rise, inflation pressures continue and the policy of appreciation will continue. The last two periods of rising US interest rates had the same pattern - SGD continued to appreciate in the face of rising rates. In fact, SGD has only depreciated during recessions in Singapore. While increasing rates would dampen the mortgage market in Singapore, and strain existing mortgages as well, these costs do not figure into MAS core inflation. Additionally, the Singapore government could ease the debt and property measures to get more targeted impact on housing pressures. Thus I will stick with history and conclude that SGD will continue to appreciate through rising US rates. However there is one caveat - Mr. Market may still strengthen the US dollar. It may turn out that all other currencies drop significantly and the SGD does not appreciate against the USD but instead against all others as it does relatively better against the dollar. I certainly will be holding long SGD against short Euro and Yen (possibly also Aussie, Pound, etc) to capture more possible movements when the Fed starts to raise rates.

Source: Unexpected Singapore Dollar Opportunity

Additional disclosure: I am long Singapore Dollars