Forex Investment and Currency Trading

Although there has been a marked deceleration in exports and the trade weighted NEER is trading on the strong side of the fluctuation band, market remains confident about further SGD appreciation and forecast end-2008 USD/SGD at 1.35.

Export growth is weak and broadbased, encompassing both the electronics and pharmaceuticals sector. Electronics exports were weak through most of 2007 and the incremental drain is largely due to the poor performance of the pharmaceuticals sector. This is not a business cycle phenomenon; the decline is more due to changes in product mix.

Accordingly, one cannot attribute the poor export performance to currency strength and official statements corroborate this view. Moreover, domestic demand conditions remain strong and have helped support overall GDP growth to within official forecasts. Unlike 2001, the current export downturn is having a less adverse impact on overall growth in Singapore.

Inflation management will remain a policy priority for the authorities. From July 2007, inflation has gapped significantly higher and has remained well above official forecasts. The rise has not been entirely attributable to the 2% increase in GST but is also due to a hardening of domestic demand conditions and tightening of labour markets. In February, inflation was 6.5% y/y, a multi-year high. The hardening of price pressures is not confined to CPI alone but also encompasses unit labour costs (ULCs) and property prices, although the latter has started to show some signs of cooling.

Monetary conditions remain somewhat benign and at odds with inflation trends. This benign scenario is despite the October exchange rate policy shift towards ‘slightly’ faster tightening. Going forward, this policy is expected to remain in place and the MAS will likely to be comfortable allowing the trade weighted NEER to trade at the top of the band