Now that global coordinated quantitative easing has been announced the world over, it makes sense to review some of the fundamentals for the U.S. Dollar versus one of the most important currencies of the future, the Singapore Dollar. The USD/SGD pair has been in a structural bull market for years, riding along with a number of other pairs which have accurately reflected the deteriorating fundamentals of the U.S. economic situation.
Why is the Singapore Dollar important? Due to its rising importance as a trade currency in rapidly expanding Southeast Asia region, which now effectively includes India as well as the Big 4 of the Pacific Rim (Japan, China, S. Korea and Taiwan). Singapore's banks right now are the most stable in the region and are growing in relatively conservative ways. Singapore for Asia will be in the coming years what Switzerland (and Zurich in particular) has been for Europe for centuries: a place of relative openness, stability, and relative neutrality.
The iShares MCSI Singapore Index ETF (AMEX:EWS) is heavily weighted towards financials, 47.5%, and is one of the few single-country ETFs where that allocation makes perfect sense. DBS Group is the biggest bank in ASEAN by assets. After financials, industrials (~25% ) and telecom (11.4%) round out the majority of the fund's sector holdings. YTD new inflows have been muted, at just $10.7 million on AUM of $1.588 billion.
The Singapore Dollar should continue on its multi-year appreciation versus both the U.S. Dollar and the Euro from a long-term perspective. It briefly tested the April low of $1.2357 last week and blew through it even before the Fed's QE announcement and is now trading around $1.227, but there is nothing keeping it from testing its all-time low set last summer at $1.2002.
The Monetary Authority of Singapore (MAS) is struggling currently with low GDP growth while trying to tame inflation. The latest figures out of Singapore have a quarterly contraction of 0.7% and lowered expectations for the year of ~2.0%. The CPI in July dropped back to 4.0% annualized which is still above the MAS's comfort zone, so we should expect them to continue to manage the exchange rate down in the face of monetary expansion by the Fed.
Since the MAS sets interest rates based on what the Fed does (the Fed has stated that ZIRP (Zero-Interest Rate Policy) will be in effect until at least 2015) and then adjusts the trade-weighted exchange rate to control inflation. Having zero-bound interest rates with rapidly rising housing costs, the biggest portion of the CPI's gain, has the MAS's hands tied with respect to the U.S. Dollar. They cannot loosen up the money supply in response to QEIII without igniting a property market already verging on a bubble to protect their U.S. trade. So, it stands to reason that they will not alter policy much from where it is between now and year end which could see a steady drop of the USD/SGD pair.
On the other hand, in the short term, the unwinding of the fear trade in that is occurring now that the ESM has been ratified by the German Supreme Court is resulting in a rush of capital back into the Euro. This has taken the EURUSD to a near-term peak of $1.31 and will take it back to the February high of $1.35 at a minimum. The CurrencyShares Euro ETF (AMEX:FXE) will perform well over the next 6 months as a hedge against the U.S. Dollar if you don't want to put your money in the SPDR Gold Trust (AMEX:GLD), believing Gold to be overbought. Euro gold, however, closed the quarter at an all-time high, breaking through key resistance at €1365.
I bring up the Euro because Singapore's banks are heavily exposed to European debt. That the SGD rose versus the Euro all summer the thesis was that a majority of that debt is of the higher-quality Northern European variety versus speculative bets on the unstable periphery of the PIIGS nations. The long-term outlooks both for the Euro and the U.S. Dollar versus the Singapore Dollar are bearish due to the massive amount of QE that has been put forth to keep their banks stabilized. This will allow the MAS to continue managing the appreciation of the Singapore Dollar versus its major trading partners, which will become increasingly regional.
Singapore's biggest single trading partner, Malaysia, has seen mild depreciation of the Ringgit versus the Singapore Dollar in the past two years, less than 5%. The next two strongest exporters, Hong Kong and China run nominal pegs versus the U.S. Dollar, so those crosses are of no analytic value. But, Singapore has been dealing with a steady appreciation of their Dollar for most of the century while maintaining a very strong balance of trade, so the MAS does not seem to be participating directly in the mercantilist currency wars, but rather skillfully have managed the situation to allow capital to flow into Singapore as raw materials that are bought with steadily appreciating currency units and exporting finished goods and not sweating the currency arbitrage which is negligible.
The bottom line is that the fundamentals for Singapore's economy are in better shape than many of its top trading partners and many of them have a need to debase their currencies to maintain their current level of economic growth, in the case of China, or size in the case of the U.S. and Europe. Exported inflation from earlier rounds of QE have placed the MAS in the position of having to defend against asset bubbles being blown via low interest rates, so they won't be attempting a competitive devaluation to protect their strong export markets, rather they will continue to allow the Singapore Dollar to appreciate to protect their manufacturers input costs.
While we like shorting the USD/SGD pair for a run down to S$1.20 now that QE has been announced, long term the USD/SGD is destined because of MAS policy to continue lower along with its regional trading partners whose currencies are not pegged to the U.S. Dollar.