Chart of the Day: Dwindling reserves point to escalating SGD weakness

The MAS is in a tough spot.

Singapore’s dwindling foreign reserves point to greater weakness for the SGD in the near term, according to a report by BMI Research.

The report said the the Monetary Authority of Singapore (MAS) has been forced to tap its reserves to prevent more aggressive SGD weakness versus the greenback.

However, this intervention has led to SGD strength against key regional currencies, such as the Malaysian ringgit and the Indonesian rupiah.

“Effectively, the MAS's SGD policy has put the central bank in somewhat of a tough position, wherein it has been forced to prevent more aggressive SGD weakness versus the US dollar by tapping its reserves even as the currency has appreciated against another group of integral trade partners. Versus a peak of USD278.0bn in June 2014, Singapore's reserves in US dollar terms have fallen by 8.9% over the past year (based on June 2015 data). While much of this is due to valuation effects, reserves have declined slightly in SGD terms (coming in at SGD341.0bn in June 2015, versus SGD346.2bn in June 2014),” BMI Research said.

“In consideration of the aforementioned current account surplus, which typically acts as a natural tailwind for reserve accumulation, this suggests that the MAS has, on balance, been taking action to support the SGD, rather than to weaken it,” BMI said.