Singapore dollar set to test new highs as MAS goes easy on the appreciation

Based on the price action the market may have been disappointed that a more hawkish move was not delivered. However, we remain bullish on SGD. Growth in Singapore is expected to be strong (possibly on the strong side of the authorities’ forecast of 4-6% y-o-y) and inflation should remain elevated, and SGD would continue to strengthen against the basket and USD in the coming weeks with the NEER still on a modest and gradual appreciation pace. In addition, the sizeable extent to which Singapore has been intervening in recent months suggests the fundamental pressure is clearly for continued appreciation.

Since October, Singapore’s FX reserves have increased by USD17bn including forwards, with estimated intervention about USD16bn. This move should help the MAS reduce its FX intervention activities until the NEER trades towards the top of the band once again.

From a regional perspective, this still sends a strong signal that inflation is a concern and that other Asian and EM authorities should continue tightening to combat rising inflationary pressure. As we have previously written, inflation is a double-edge sword which can be positive or negative for FX depending on whether central banks are willing to manage it effectively. For now, we believe inflation remains a positive driver for Asian FX. However, we think more needs to be done.

The hawkishness of the MAS should encourage Asian central banks to tighten further through both FX and rates, putting greater downward pressure on USD-Asia, and particularly on USD-SGD, in the coming weeks.