We do not participate, but we observe
The Singapore dollar is rising steadily due to the confidence of market participants that the Monetary Authority of Singapore (MAS) will tighten monetary policy. Core inflation in the country rose to a 14-year high, and the sing has established itself as Asia’s strongest currency against the dollar this year. Therefore, some strategists are betting on its further strengthening – if price pressure forces the country’s central bank to tighten its policy again.
Nearly all major currencies are retreating against the dollar, and the US Federal Reserve is set for an aggressive rate hike cycle. Against this backdrop, the sing has already come out on top against other Asian currencies, but it is still more than 4% below the US dollar this year.
Unlike most central banks that use interest rates, the MAS is responding to rising core inflation by appreciating the local dollar against a basket of the currencies of its major trading partners. The central bank focuses on the nominal effective exchange rate of the Singapore dollar, called the S$NEER.
Although, analysts say, even if the MAS tightens policy for the fourth time this year, there is no guarantee that the local currency will strengthen against the US dollar. Earlier this month, the Singapore dollar fell to its lowest level in more than two years, and only by the end of last week narrowed its fall in 2022 to 4.1%.
On Friday, Singapore’s core consumer price index for August will be released; it is forecast to grow by 5% compared to the same period a year earlier. In this situation, the local currency may come under pressure if the data disappoints and expectations of further tightening of monetary policy decrease. However, its leading position as the currency of “banana-lemon Singapore” among the currencies of the region is not now in doubt, it holds it, if we continue to recall the famous tango, “to the screams of monkeys.”
Meanwhile, according to the latest data, inflation in Singapore has already reached 7% – this is the maximum since 2008, said Mikhail Zeltser, an expert on the stock market at BCS World of Investments. The Central Bank is forced to respond to such high price pressure by raising the rate: the zero cost of funding at the beginning of the year has grown to 2.34%, and, most likely, the regulator may again raise the key rate, especially given yesterday’s increase in the US Federal Reserve’s key rate.
Nevertheless, the expert notes, the rate of growth in the rate in Singapore is lower than the rate of inflation taken by the US Federal Reserve, and this discrepancy still leads to the devaluation of the national currency of Singapore. Since the beginning of the year, the Singapore dollar has weakened by 5% (although this is a multiple of the losses of the same Japanese yen – 27% since the beginning of the year). Therefore, the potential for its weakening seems to be inexhaustible – in the coming months, one should not be surprised at the growth of the USD / SGD pair from the current 1.42 to 1.45, or by a couple of percent more, Zeltser says.
In the Russian market, there are essentially no opportunities to invest in Singapore’s currency against the backdrop of the toxic dollar, euro, yen, pound and franc, the analyst states. Therefore, if there is a desire for currency diversification, then it is better to pay attention to other Asian currencies – the Chinese yuan or the Hong Kong dollar – with them there are much less geopolitical risks, and the HKD/RUB pair (Hong Kong dollar against the ruble) exactly follows the dynamics of the global dollar.
Following the course of the unstoppable
The dynamics of the Singapore dollar as a whole is in the general trend of the weakening of major currencies against the US, confirms Mark Goykhman, chief analyst at TeleTrade. The point here is the unstoppable growth of the US dollar, tearing up due to the very tough policy of the Fed.
A landmark event was yesterday’s meeting of the Fed, which not only raised the interest rate immediately by 0.75 percentage points, from 2.5% to 3.25%, which was expected by investors, but also announced the possibility of an even more significant increase than previously predicted to fight inflation. Namely, up to 4.4% by the end of 2022 and up to 4.6% in 2023. Such a verdict lifted the course of the “American” in the market to new twenty-year highs. In particular, it rose to Singapore’s “namesake” on September 21 from 1.410 to 1.417, and at the beginning of the day on September 22 it exceeded 1.420. Since the beginning of this year, the exchange rate has grown from 1.35, that is, by 5.2%.
Possibly, suggests Goykhman, and in the future the dynamics of this regional currency will follow the American one. In this case, the “Singapore” is a follower, like most other currencies. Although the interest rate in Singapore has been rising in recent months from near-zero levels to 2.3%, it clearly lags behind the Fed in dynamics. Lower inflation compared to the US – 7% and 8.3% respectively – is unlikely to force the regulator to force ahead of the US dollar. Yes, and the export-oriented economy of Singapore is more beneficial relative weakening of its currency.
As a result, there is a high probability of the USD/SGD pair moving further towards the technical boundaries of 1.44-1.46, where it was at the beginning of 2020, at the dawn of the pandemic, Mark Goykhman believes. At the same time, in September-October, having worked out yesterday’s decision by the Fed by a sharp increase, the asset, like the US dollar itself, is able to correct to levels below 1.40.