Currency Briefing - what you need to know for Thurs May 17, 2012

The Singapore dollar has so far depreciated by 2.4% against the US dollar this month.

DBS Group Research said:

Eurozone troubles have returned to hurt the Singapore dollar again. As of yesterday’s close, the SGD has, so far, depreciated by 2.4% against the US dollar in May.

Technically, we do not expect May to experience the same volatility experienced last September, when the SGD experienced its worst ever one month fall of 7.9% vs the greenback. A repeat of this would lift USD/SGD to 1.34 by end-May which is highly improbable.

Unlike September, our in-house SGD nominal effective exchange rate (SGD NEER) was not at the strong side of its policy band, but has been fluctuating around its mid-band despite the relief rally in global markets earlier in the year from the European Central Bank’s Long Term Refinancing Operations.

Second, the Monetary Authority of Singapore (MAS) narrowed the SGD NEER policy band at its last policy review on April 13. According to our model, the band was narrowed to ±2% around its mid-point from ±3% previously. This should help to mitigate some of the downside risks to the SGD by lifting the bottom of the policy band.

RBS meanwhile noted (for 16 May 2012 trading):

Markets were active today in what was generally a risk-off session.

The EUR declined after initial reports suggested that the ECB was cutting off some Greek banks from emergency funding but the EUR regained those losses after the ECB clarified that the move was temporary, pending recapitalization of those banks.

In the meantime, those banks would use the ELA for emergency funding. An unnamed ECB official said the ECB was not planning any immediate stimulus, but this appeared to be in line with market expectations and we expect the next round of forecasts, and lower growth data and inflation, may prove instrumental in allowing for further easing.

As this gets priced in we expect further EUR weakness (we hold EUR shorts vs. the USD and CAD). The other major risk event was the FOMC minutes, and while the minutes seemed on the balance more dovish-than-expected and shifted the balance closer to QE, they did not go so far as to signal additional QE was imminent. As a result, the currency reaction was fairly neutral to the minutes.

IG Markets Singapore, on the other hand, noted:

The Singapore dollar continues to be hurt by the souring of sentiment from the eurozone collapse and Greek political crisis.

It fell to a near four-month low against the greenback but has recovered some ground.

In last night’s session the local currency fell to $1.2717 against the US dollar although it now trades at $1.2654.

Risk currencies have been suffering a torrid time since the failed Greek elections last week.

Market pessimism fell further last night over speculation about the health of Greek banks. Equities tumbled as risk-on trading ran for cover.

Meanwhile, the greenback has been rallying as investors regard it as one of the safest assets in these times of trouble.