Forex Investment and Currency Trading

SGD: MAS more aggressive than expected
 
The key event overnight was a surprise tightening of policy by the MAS, through a re-centering of the SGD NEER to the prevailing level, representing an effective 1% upward revaluation.
  
Today, the MAS re-centred the SGD NEER to the prevailing level and changed its stance to one of “modest and gradual appreciation”. The central bank will target 2% appreciation in the SGD NEER. A contributing factor to the MAS decision was the strong Q1 GDP print - the economy grew at a 32% annualised rate - but the government also issued a more optimistic appraisal of global growth conditions. The shift to a tightening stance should be taken as a sign of greater determination to decisively pre-empt inflationary pressures and possibly pave the way for general elections this year. Market initial estimate of the implied USD/SGD value for the upper bound of the band is 1.368. The range for USD/SGD in one year, assuming a 2% pa slope, would be 1.3385-1.3794. Even so, with inflation remaining subdued and the prospect of a narrower current account surplus, the SGD NEER is not likely to drift to the top of the band. One indication is that the SGD NEER was trading less than 75bp above the new midpoint of the band three hours after the announcement.

AUD/NZD: Price action and data keep us sidelined
 
While remaining bearish on AUD/NZD over the next few months, the short-term price action has not been very encouraging. Technical strategists are bullish, highlighting that despite the recent pullback, the cross remains in a strong uptrend. In addition, overnight data provided a boost - Australian consumer confidence fell slightly but the drop was smaller than would normally be expected given the magnitude of RBA tightening this cycle. In addition, NZ retail sales were much weaker than expected in Feb on both headline and core measures - with the only bright spot being it follows a strong Jan and strong credit card spending in March bodes well for future retail sales. There are some key events for NZ over the next couple of months ahead including inflation (Apr 20), employment (May 6) and the budget (May 21) - if these come in line with market expectations, they could be the triggers for a reversal lower in AUD/NZD.  
 
China data and commodity currencies
 
The market will also be closely watching the China data releases tonight. China economists expect data to continue to point to solid growth with benign inflation, which would help to keep commodity currencies grinding higher. However, they expect most of the cyclical data to come out slightly below, or in line with, the Bloomberg consensus medians: real GDP growth to rise to 11.3% from 10.7% in Q4 09 (consensus 11.4%);YTD growth in FAI 26.1% y/y (consensus 26%); retail sales growth of 17.8% y/y (consensus 18%); and industrial production growth of 18% y/y, which is in line with consensus. Indeed, the slightly negative surprises to activity data may weigh on commodity currencies - given the relationship commodity currencies have had with a data surprise index for China. However, in terms of the inflation data, economists expect good news on this front and look for CPI inflation to show only a moderate pick-up to 2.4% y/y from the 2.1% averaged in January-February (averaging out Lunar New Year effects). This is significantly below the Bloomberg consensus median of 2.6%. Outcomes in line with our China economists’ forecasts would lead to a recovery in our China DSI (which deducts upside surprises in inflation from upside surprises in the cyclical data to reflect potential concerns investors may have about a more aggressive tightening in policy by Chinese authorities) and help to keep commodity currencies (in particular the AUD) grinding higher.