MAS leaves policy unchanged for SGD NEER

This is contrary to the general expectation of a change in MAS policy to allow for more weakness in the local currency.

IG Markets Singapore said:

Due to the MAS policy announcements we saw big moves early today for the Singapore dollar. As the regulator’s policy towards the SGD remains unchanged we saw strengthening and a breakout from the range which had been traded for the entire week in the build-up to today’s announcement.

Officially Singapore avoids a technical recession this morning, as Q2 GDP was revised higher to +0.2% while Q3 data shows a quarterly contraction of 1.5%.

The MAS have left their policy unchanged for the Singapore Dollar Nominal Effective Exchange Rate. Both the slope and width of the band are surprisingly untouched as the central bank is mindful of containing inflation pressure as well as growth in the economy.

The vast majority of analysts had expected a change in MAS policy to allow for more weakness in SGD, attempting to combat the strains from the slowing global economy.

Having held a 20-point range either side of 1.23 for most of this week prior to the announcement, in response the SGD moved from 1.2280 against the greenback to briefly print sub-1.22, and has now settled down around 1.2220.

If we see further general USD weakness over the course of the trading day, a weekly close below 1.22 is possible. This could signal further strength for the SGD in the weeks ahead.

OCBC Treasury Research meanwhile noted:

This morning, the MAS maintained the relative position of the parity, slope and bandwidth of the SGD NEER at its semi-annual policy meeting, tripping the USD-SGD slightly lower as the decision was at odds with prior general expectations.

In its statement, the central bank remained relatively sanguine and did not seem overly concerned with downside global growth risks, noting that “recent central bank initiatives worldwide have reduced the risk of a severe global recession”.

Despite muted imported price pressures, the authorities continued to point towards domestically driven costs and tight labor market conditions (especially in the next two quarters), despite a projected moderation of core inflation to 2-3% next year from a projected 2.5% this year.

Overall, we think the tone of the statement continued to be unambiguously tilted towards inflation containment rather than growth amid potential pressure points from “domestic supply side factors” given the ongoing restructuring in the economy.

Expect USD-SGD to remain trade with a top heavy bias into the end of the week with the fall in the pair post-MAS this morning bringing SGD NEER to around +1.46% above its perceived parity (1.2395).

At current prices, the extreme strong end of the NEER fluctuation band is estimated at around 1.2200 and expect official presence to be felt if the USD-SGD attempts to make a unilateral breach below this area. Our year-end forecast for USD-SGD remains at 1.2430 at this juncture.

Beyond the very short term, we expect the impact of today’s MAS decision to fade and the USD-SGD to resume its sensitivity to broader dollar trends, global growth expectations, as well as net capital inflows into the region.

On a related note, the 6M forward SGD NEER (full basket) is currently approximately at par and given the current global prognosis, may still not be reason enough at this juncture to institute a long SGD, short basket posture.