Why further gains in Singapore dollar could be unlikely

MAS may step in to prevent the currency from strengthening further.

The Singapore dollar has appreciated by 4.7% since January, but further gains would likely be limited as BMI Research predicts.

"With the Monetary Authority of Singapore (MAS) having kept its Singapore dollar policy on hold at its bi-annual meeting in April 2017 and likely to remain on hold through October, we believe that further gains are likely to be limited," BMI Research said in a report.

It noted that SGD's nominal effective exchange rate and real effective exchange rate have been strengthening, leading for it to trade at the midpoint of the central bank's policy band. This suggests that excessive strength is unlikely as the MAS will seek to prevent the currency from trading above the band amid the still-uncertain growth outlook.

"However, we expect the real interest rate differential between Singapore and the US to remain in favour of the SGD over the coming quarters, supporting the SGD. While Singapore's interest rates are linked to that of the US, inflation in Singapore is likely to remain considerably lower than that of the US," BMI Research said.

In terms of long-term outlook, the currency is expected to average S$1.41/US$ this year, and S$1.37/US$ in 2018 as a strong external position, low inflation relative to the US, and a solid fiscal position provide support for the currency.

"However, significant strength will be capped due to a weaker CNY and a cautious MAS, which will seek to prevent excessive SGD strength lest it undermines Singapore's exports.," BMI said.