SINGAPORE’S EXCHANGE RATE & MONETARY POLICY REGIME
Singapore is a small, open economy where gross exports and imports of goods and services account for more than 300% of GDP, and domestic expenditure has high import content. For these reasons and others, the Monetary Authority of Singapore considers the exchange rate a much stronger instrument in controlling inflation than interest rates.
The MAS’s monetary policy framework is, therefore, centred on managing the SGD against a trade-weighted basket of currencies (S$NEER). There are three main components to managing the SGD against this basket: 1) the mid-point of the band, 2) the width of the band (from the midpoint) i.e. the MAS’ tolerance to exchange rate volatility and 3) the slope of the band which determines the path of currency appreciation/ depreciation between meetings.
As of March 30th, the MAS adopted a 0% per annum rate of appreciation of the policy band to ensure monetary and financial stability throughout the Covid-19 pandemic, and re-centred the policy band downward to the then prevailing level of the S$NEER. The move down reflected the impact of the pandemic on Singapore’s economic fundamentals and was the first dual easing measure taken by the central bank since the MAS first adopted the framework. Prior to the MAS’ easing measures, the S$NEER had depreciated to below the mid-point of the policy band as macroeconomic conditions worsened following the virus outbreak, while no changes were made to the width of the policy band. The 0% appreciation of the policy band going forward will impart a degree of stability to the trade-weighted exchange rate. This measured change to the policy stance reflects the primary role of fiscal policy in mitigating the economic impact of Covid-19 and was aimed at ensuring ensure price stability over the medium term. The MAS also provided ample SGD liquidity into the banking system through its daily money market operations, allowing banks to provide credit to individuals and businesses. Additionally, the central bank established a MAS USD facility to provide up to US$60bn of funding to banks in Singapore to support stable USD liquidity conditions.
USDSGD continues to trade around the MAS estimated mid-point
The Singapore dollar reached a six-month high after the government unveiled yet another stimulus package, reducing the need for further monetary easing. Deputy Prime Minister Heng Swee Keat announced additional wage support on Monday last week to protect the hardest hit sectors. The total for pledged pandemic aid is now over S$100bn ($72bn) and follows years of budget surpluses. The increased wage support, combined with the extension of the job support scheme, should help protect the labour market and mitigate some of the fears markets may have over a new virus wave in Singapore, although the nation managed to reel in its second wave from a daily peak of 1,426 cases to about 300 a day.
While the series of fiscal injections certainly played a role in the recent USDSGD price action, broad US dollar weakness remains a major driver in the pair’s moves and remains a dominant theme in currency markets.
We believe the current trend towards a fundamentally weaker dollar is likely to hold in the medium-run as the domestic economy lags due to a significantly more persistent Covid-19 outbreak and scarring to the labour market, and the FOMC’s reaction function becomes significantly more dovish (html to USD outlook). In May, we stated that USDSGD is unlikely to move below 1.40 without broad USD weakness (html to sgd outlook), partly due to the premium SGD has regained over its Asian peers since the sell-off in March. As the MAS controls the exchange rate of the SGD against a basket of other Asian currencies, and the trajectory is currently flat, this means that the Singapore dollar can’t appreciate against all of its peers. How far the SGD can rally against the US dollar is determined by how much its peers in the basket also rally against the US dollar.
SGD performance against USD vs other Asian currencies
Singapore’s exports saw a virus-related slump in July, but non-oil domestic exports remained robust and rose 6.0% year-on-year in July following an increase of 13.9% in June. Non-oil domestic exports, of which over 60% comes from electronics, pharmaceuticals and chemicals, fell 8.8% on average last year. Exports to the US surged 98.6% year on year in July after recording a growth of 23.0% in June. The relatively robust exports signal that the contraction in Singapore’s GDP in Q2 may not be as deep as the estimated 12.6% year on year. Signals for household spending also improved sharply in the final month of Q2, with retail sales falling 27.8% year on year in June after a 52% nose-dive in May. Headline CPI inflation in Singapore increased slightly to -0.4% YoY in July from -0.5% YoY in June, as private road transportation costs declined by a smaller amount in July due to higher car prices. Services and retail inflation rebounded slightly as well, while food inflation edged down in July. Similar to other countries, Singapore’s economic outlook for the second half of the year looks brighter than Q2 but depends on the domestic trajectory of Covid-19 and what containment measures are necessary. Singapore’s export-oriented economy also makes it more sensitive to global shocks and therefore the global trajectory of the virus, especially in the US.
Author: Ima Sammani, FX Market Analyst