Forex Investment and Currency Trading

Today the Monetary Authority of Singapore (MAS) announced a modest monetary tightening. In the twice yearly monetary policy statement (MPS) it maintained its FX stance of a “modest and gradual appreciation” of the Singapore dollar (SGD) nominal effective exchange rate (NEER) which had been “increased slightly” in the previous policy statement announcement in Oct-071. Also importantly, due to rising inflation risks, the central bank opted for a one-off re-centring of the SGD NEER policy band at the current level of the SGD NEER. The last time there was a re-centring was back in July-03, with the mid-point set at the prevailing level.

This acted as a de facto loosening of exchange rate policy at the time when growth was facing severe challenges. Given that the SGD NEER was trading close to the strong end of the band before the meeting this move is effectively an exchange rate tightening of 1.5% given that we assume the width of the SGD NEER policy band is +/- 1.5%. The market has already pushed the SGD NEER from the centre towards the new stronger end of the band. Given that inflation concerns continue to outweigh growth concerns the SGD NEER is expected to continue to trade in the strong end of the band in the near term. Following this recentring the strong end of the SGD NEER policy band is estimated to be in USD-SGD terms is 1.3533 (given present levels of trading partner exchange rates).

Singapore’s January and February CPI inflation came in much higher than expected at 6.6%y/y and 6.5%y/y respectively, the highest in 25 years, since the monthly data was made available in 1983. While food and oil related increases still remain significant, domestic sources of inflation are also clearly exerting their presence now and these domestic sources cannot be adequately addressed by a strong SGD. More visible domestic sources of inflation include record high housing costs and higher healthcare and education costs.

mitigate the effects of imported inflation while keeping the MAS SGD NEER policy stance unchanged. The market has already tried to push the SGD NEER higher to test the new limit of the SGD NEER policy band. The SGD NEER is expected to continue to trade in the stronger end of the SGD NEER policy band near term as inflation concerns continue to outweigh growth concerns. However, with the worsening of the global economic outlook likely to become more apparent later in the year the MAS may reverse its Oct 07 steepening of the policy band to a more gradual appreciation of the SGD NEER policy band. The probability that the MAS may ease to a neutral SGD NEER policy stance in the next monetary policy statement scheduled for October-08 seems to have significantly fallen with the inflation outlook remaining hawkish. As the market may anticipate an easing of monetary policy ahead of the October-08 it is still possible that ahead of this the SGD NEER could move to the weaker end of the band.