Forex Investment and Currency Trading

Singapore will be releasing the advance GDP estimates for Q1-08 and the semi-annual monetary policy statement on 10th April 2008. Even though a technical recession is not expected, the slower growth momentum in certain sectors is likely to see GDP growth moderate. Singapore’s January CPI inflation came in much higher than expected, the highest in nearly 3 decades. While inflation did moderate slightly in February, food and oil related increases still remain significant. However importantly, domestic sources of inflation are also clearly present and these domestic sources cannot be adequately addressed by a strong Singapore dollar (SGD).The Monetary Authority of Singapore (MAS) is continued to expect to maintain its policy of a modest and gradual appreciation of the SGD nominal effective exchange rate (NEER) policy band without any change to its slope or width. However, given the likely persistently higher inflation in H1-08 the risk of a re-centring of the SGD NEER policy band at the current level of the SGD NEER is raised.

No technical recession yet but growth is likely to slow in Q1-08

Even as it transitions into a more diversified economy, Singapore has delivered strong growth in 2007, the focus has clearly shifted to a more sombre outlook this year with growth likely to moderate and inflation likely to worsen at the same time. Considering Singapore’s position as a small, open economy with total trade amounting to 300% of annual GDP, a global slowdown, especially a prolonged US recession will have major consequences for exports. Export growth slowed in 2007 and even as we saw a slight recovery in January and February, exports should remain on a weakening trend with growth likely to remain soft for most of this year.

At the same time, inflation surged further in January and February, not just in Singapore but also in most Asian economies. Singapore’s January CPI came in much higher than expected, the highest in 25 years.

Against this background of weaker growth and higher inflation, the Monetary Authority of Singapore (MAS) will be releasing it semi-annual monetary policy statement on Thursday, 10th April. In October-07, the MAS kept its policy of modest and gradual appreciation on the SGD but steepened the slope of the SGD NEER policy band which is estimated to be 2.5% per annum now from 2% previously on the back of emerging inflation risks. This change in policy was based on inflationary concerns outweighing the weaker growth outlook as domestic cost pressures rose markedly while downside risks to growth remained relatively low-risk at the time. Since then, the external outlook optimism has plunged while inflation surged around the region.

The risk to inflation being on the upside is continued to be seen. While inflation is still expected to moderate going into 2009, we are likely to have faster price increases. Despite the exceptional inflation registered in January and February, the view is that the MAS will keep its Oct-07 stance of “a modest and gradual appreciation of the SGD NEER policy” especially when the stronger SGD cannot mitigate domestic sources of inflation. Since 1st September-07 the SGD has appreciated 10.32% against the USD, making it the second strongest performer among AXJ currencies after the Philippine peso (PHP). The comments by the Finance Minister Tharman Shanmugaratnam in February that there is a limit to how fast the SGD could appreciate suggest the MAS may not let it strengthen too much as it may impair Singapore’s competitiveness.

There is a higher risk now that the MAS opts for a one-off re-centring of the SGD NEER policy band at the current level of the SGD NEER. Given that the SGD NEER is trading close to the strong end of the SGD NEER policy band that will effectively be an exchange rate tightening to help partially mitigate the effects of imported inflation while keeping the MAS SGD NEER policy stance unchanged.

If the MAS chooses to re-centre the SGD NEER policy band at around the current levels then we would expect the market to try to push the SGD NEER higher to test the new limit of SGD NEER policy band.

In any case, the SGD NEER is expected to continue to trade at the stronger end of the SGD NEER policy band near term as inflation concerns continue to dominate growth concerns. This coupled with a broadly weak USD, to make the call that USD-SGD will drop to 1.35 by end-Q2 08. However, with the worsening of the global economic outlook becoming more apparent later in the year the MAS may ease to a neutral SGD NEER policy stance in the next monetary policy statement scheduled for October-08. As the market may anticipate an easing of monetary policy ahead of the October-08 monetary policy statement the SGD NEER could move to the weaker end of the band in H2-08. Therefore, the view is that USDSGD will rebound to 1.37 and 1.39 in Q3-08 and Q4-08 respectively.