Chart of the Day: See how Singapore dollar is affected by Japan yen weakness

S$NEER has already risen 110bp.

According to Nomura, the MAS reduced both its core and headline inflation forecasts in its policy statement, which provides additional support to the firm's short S$NEER recommendation.

"We believe the reduction of these inflation forecasts and the more dovish rationale is significant and could raise expectations of a policy shift toward neutral," Nomura said.

Here's more from Nomura:

We note that in April 2012, inflation forecasts were raised and the MAS stated that it increased the slope of FX appreciation „slightly‟ to „anchor inflation expectations‟ and ensure „medium-term price stability.‟

The fact that the global growth backdrop could be weaker than expected also supports a shift toward a more neutral FX policy. Nomura‟s growth forecasts for Europe, China and Japan are less optimistic than the latest IMF 2013 forecasts.

The main risk to our short S$NEER recommendation is highlighted in the policy statements, where the MAS notes that the decline in JPY „led to upward pressure on the S$NEER.‟

Since 13 November 2012, S$NEER has risen by 110bp, and the contribution from the SGD/JPY component has been about 220%. If JPY continues to depreciate sharply in the near-term, we expect appreciation pressure on S$NEER to continue.

However, given our G10 FX strategy forecast of 101 on USD/JPY by end- Q3 2013, JPY may not be a big driver of S$NEER strength in the coming months, in our view.