Forex Investment and Currency Trading

The Monetary Authority of Singapore (MAS) is likely to keep its FX appreciation policy unchanged in its April 10 monetary policy statement. Inflation is higher than expected and 2008 GDP growth is forecast to slow, but should remain within the potential 4-6% range. However, with the S$NEER close to the extreme strong side of the policy band (last at 1.7%), there is limited near-term upside from a reconfirmation of current policy. The risk is for a more significant fall if there is a shift in focus to growth over inflation, and especially from any easing in the slope of appreciation.

The MAS will likely to maintain its current FX appreciation policy bias with no recentering or adjustment in the width or slope of the policy band is in line with consensus.

This view reflects mainly the upside surprises on inflation and the forecast of slower local growth, but no technical recession. The government on February 14 revised up its 2008 CPI forecast range to 4.5-5.5% from 3.5-4.5%, mainly on the unexpected strength of global commodity and food prices, but also on the strength of domestic credit growth.

On the growth front, market forecasts no technical recession in Singapore with Q1 2008 GDP growth to rise 1.3% q-o-q saar from -1.2% q-o-q saar in Q4 2007. The full-year growth forecast at 4.4% y-o-y suggests that the economy will remain around potential growth (4-6%), as forecast by the Trade Ministry.

The risk to the base view is a shift in the slope of appreciation back towards the pre-October 2007 estimate of 2.0% annualised (from the current estimate of 2.5%) or if there is an increase in focus of growth over inflation in the statements.

After reviewing the October 10, 2007 policy statements, it is evident that most of the positive growth comments have lost support. The MAS highlighted then that “financial markets have rebounded” and that the “global economy is expected to remain resilient.” Since then, the local equity market has fallen by almost 20%, and global growth expectations have been revised significantly lower. Lastly, the construction and business services sectors have expanded as expected in the October statement, but the manufacturing sector, which
grew in January-February, has contracted sharply against expectations in Q4 2007.

RISK-REWARD FAVOURS BEING SHORT S$NEER

Based on the downside versus upside risk to the S$NEER (last at 1.72%), risk-reward favours being short S$NEER. If the MAS keeps policy unchanged with a reiteration of upside inflation risk and its October view that economic conditions remain supportive, then upside is limited towards 2.0%. However, if it emphasizes a focus of growth over inflation, or lowers the slope of appreciation, the S$NEER could sell off sharply (particularly with a policy shift) given that the market is pricing in no change. This event could also lead to a spike in short-end SGD volatility relative to the long end.

There have been previous episodes of a shift in MAS policy away from headline inflation, as seen in the fall in CPI in 2006 and strengthening of the S$NEER. This may have been on the back of MAS pro-activeness on rising price pressures.

The percentage year-on-year S$NEER has to some extent realigned with inflation since September 2007, but the percentage year-on-year rise in the S$NEER has been marginal.

Market sense that the focus of the authorities may have already begun to shift more towards growth, with lead indicators of both growth and inflation beginning to point lower. Broad money M3 growth has slowed since June 2007, whilst commodities are off their March highs. On the growth side, the growth continues to fall.

Even if the MAS keeps its policy unchanged on April 10, the market will watch for any signs of increased focus on downside growth risks, which will raise expectations of a shift in policy to less tightening, or even neutral, at the next semiannual policy announcement in October.