Since our last SGD outlook, developments globally and in Asia have resulted in a stabilisation of the S$NEER – a trade weighted nominal exchange rate index used to control the value of the Singapore dollar by the Monetary Authority of Singapore. While the Singapore dollar has rallied against the US dollar, on the basis of broad based USD weakness over the last 6 months and a faster economic recovery in Asia, the premium the Singapore dollar commanded over its other peers has diminished somewhat.
Since October, SGD has depreciated substantially against the Korean won (-1.8%), Chinese renminbi (-2.34%), Thai Baht (-3.05%) and Indonesian Rupiah (-3.28%), while only strengthening against the Hong Kong dollar (+2.67%) when analysing against major trading partners.
These offsetting factors have allowed the USDSGD rate to grind as low as 1.32 in the early parts of January 2021 while not inviting FX intervention measures by the MAS as the S$NEER remains within the confines of their current monetary policy framework. Given the recent stability in the S$NEER and the MAS’ latest policy decision to hold a flat appreciation channel in October, the outlook for USDSGD remains dependent on global economic conditions and US dollar dynamics ahead of April’s monetary policy announcement.
The S$NEER flattens after the MAS decision in March 2020 to lower the mid-point and flatten the appreciation channel to 0% per annum, with SGD rallying against USD but trading flat vs CNY since
USDSGD TO TRADE STABLE AS GLOBAL ECONOMY BATTLES TO DISTRIBUTE VACCINES, BUT SGD MAY CONTINUE TO TAKE ON WATER AGAINST ASIAN PEERS
The US dollar’s broad decline has stalled somewhat at the beginning of 2021 as the distribution and efficacy of vaccines against new strains in major economies increases uncertainty in the global economic outlook. While we anticipate the US dollar’s structural decline to continue over the course of the year, the lack of clarity over when major economies will begin to reopen means the greenback is likely to find near-term support in Q1. However, Singapore is one exception as authorities have clearly signalled a realistic timeframe for vaccine distribution. Recently, Senior Minister of State for Health, Janil Puthucheary, stated that Singapore will have the capacity and capability to vaccinate its entire population by Q3. This is much earlier than other peers, even within Asia and Australasia where the battle against Covid-19 has been a relative success. This outlines why the Singapore dollar hasn’t aggressively sold-off after touching a fresh 33-month high against the dollar in early January despite the greenback’s resurgence. Given this market dynamic, which we expect will persist for much of Q1, we believe the Singapore dollar is well positioned to offset a robust US dollar, resulting in a relatively flat USDSGD rate around current levels.
While we anticipate a stabilisation in the USDSGD rate in the near-term, the headwinds the Singapore economy currently faces are likely to result in SGD taking on more water against Asian peers.
A strong domestic growth outlook in China keeps us bullish on CNY and HKD, although recent developments in mainland China suggest that their rally will slow in Q1. Overall, this will result in a mild depreciation in the S$NEER which will see the Singapore dollar’s trade weighted value return to the mid-point of the policy band.
Developments in USDSGD past Q1 are less clear. While we expect the Singapore dollar to benefit from our anticipated decline in the US dollar, structural headwinds to the domestic economic recovery in the shape of global travel will remain. Meanwhile, external growth conditions are expected to improve, resulting in a more optimistic outlook for Singapore’s export sector. It is unclear how these factors will play out with respect to Singapore’s economic recovery, but given the MAS is due to review its monetary policy framework in April, we don’t anticipate any changes to the current S$NEER channel. This means any further SGD strength will likely be muted unless it is offset by depreciation against other trading partners’ currencies. Given our view on the cyclical decline in the US dollar over the coming year, we envisage a mild decline in the USDSGD rate over the 12-month horizon, which is offset in part by a depreciation in the Singapore dollar against higher growth APAC currencies. This is likely to remain the case until October, when the MAS review the current monetary framework. An improvement in global conditions may result in the MAS reverting to a mild appreciation channel in October; however, the level of uncertainty around this view is elevated. This poses potential downside risks to our USDSGD forecasts towards the back-end of the year.
Monex Europe’s February SGD forecasts
Author: Simon Harvey, Senior FX Market Analyst