Forex Investment and Currency Trading

The Monetary Authority of Singapore (MAS) today eased its monetary policy stance by switching to a neutral policy of 0% appreciation of the Singapore dollar (SGD) Nominal Effective Exchange Rate (NEER) policy band in its latest monetary policy statement (MPS), after tightening two consecutive times in October 2007 and April 2008. There has been no re-centring of the policy band nor any change to its width. The shift in policy is based on weak growth expectations amidst a rapidly deteriorating external environment and worsening credit crisis. More recently, the barrage of rate cuts around the world at a time when inflation pressures are easing may have made the decision to loosen policy much easier. Advance GDP estimates for Q3-08 not only showed that Singapore was in a technical recession in Q2-Q3, but that the economy also contracted, the first yearly decline since Q2-03. A key implication of switching to a neutral policy is likely to be immense upside pressure on SGD SIBOR and a subsequent negative effect on borrowing activity in the domestic market. Furthermore, a significantly cheaper SGD is unlikely to help lighten the immediate liquidity squeeze in the financial sector, while heightening the risk of rekindling imported inflation. Market expects the MAS to maintain the neutral FX stance in its next MPS in April 2009 as inflation retreats markedly in early 2009. Given the more challenging growth outlook, the SGD NEER is likely to trade close to the floor of the policy band over coming months.

Exchange rate policy and the SCB SGD NEER model: 0% appreciation

Despite the current high level of inflation, the MAS has decided to shift to a neutral (i.e., 0% appreciation) SGD NEER policy due to the rapidly deteriorating growth outlook. Given that Singapore is likely to face even weaker growth in 2009 than in 2008, the MAS is likely to keep this neutral FX stance in its April 2009 MPS. Since early August, the SCB SGD NEER index has for the most part traded in the weak half of the estimate of the policy band. While this has coincided with a broad USD rebound in recent months, the move has also been consistent with market expectations that the MAS would ease its exchange rate policy at today’s meeting. Over the last week, the SGD NEER has moved further towards the floor of the band. Ahead of the announcement, the market tried to push the SGD NEER to test the floor of the policy band, with rumours that the MAS has been intervening. Over the coming months, we would expect the SGD NEER to continue to trade close to the floor of the policy band as growth slows further, inflation eases, and the market foresees the MAS maintaining its neutral NEER stance at its April 2009 policy meeting. This will be akin to what happened during H2-01 after the shift to a neutral stance in July 2001. The MAS had been expected to reduce the slope of the SGD NEER to 2% per annum from 3.25% per annum at today’s meeting, followed by a move to a neutral FX stance in April 2009.