Singapore dollar muted

The local currency is suffering slow depreciation against the greenback.

IG Markets Singapore said:

The Singapore dollar remains stuck in a tight trading channel against the greenback as it sits at $1.2257 this morning.

The local currency has been out of favour along with other Asian currencies ever since the fiscal cliff fears resurfaced. This has seen plenty of cautious trading in the FX markets as traders flee to the safety of the greenback.

Talks are still ongoing between US lawmakers to bash out a solution to the fiscal cliff. But until concrete plans are on the table there remains a lot of uncertainty which is causing a fog among currency traders.

While the Singapore dollar has been muted, it is suffering a slow and painful depreciation against USD during these uncertain times, as we head to the year-end.

DBS Group Research meanwhile noted:

Fed Chairman Ben Bernanke’s speech summarized how binary the US fiscal cliff issue has become. If US lawmakers fail to resolve the issue, Bernanke warned that there was not much monetary policy could do to prevent the US economy from falling back into recession. Alternatively, if the cliff is averted, Bernanke reckoned 2013 could turn out to be a good year for the economy.

Given this prognosis, investors were basically unsure whether to extend Monday’s rally, or worry about missing a rally if US lawmakers compromise on their differences over how to fix America’s fiscal finances. The Dow closed at 12788.51 yesterday, barely changed and only marginally lower from Monday’s 12795.96 close.

Over in Asia, US President Barack Obama reminded Premier Wen Jiabao that the US and China have joint responsibilities to ensure a sustained and balanced growth model for the global economy. With Eurozone in recession, and likely to be followed by Japan, the world is indeed looking at the world’s two largest economies to support global growth.

Against this background, America is only seen able to push its agenda for a weaker US dollar against the Chinese yuan and other surplus-led Asian currencies if US averts the fiscal cliff.

Interestingly, Japan is not considered one of these Asian currencies. In fact, Japan reported its fourth straight monthly merchandise trade deficit of more than 500 bn yen this morning. The yen has been depreciating steadily, day by day, since November 14, when it became evident the country may elect a new government next month that will push for aggressive “unlimited” monetary easing policies.

Market continued to push USD/JPY higher yesterday despite Bank of Japan governor Masaaki Shirakawa’s rejection of opposition leader Shinzo Abe’s push for a 3% inflation target. Shirakawa is due to retire next year; Abe has pledged to replace him with a like-minded successor.

This has resulted in weaker yen crosses against major currencies such as the euro, sterling and the Oz. For example, EUR/JPY is pushing higher towards 1.05, to levels not seen since early May. EUR/USD recovered quickly from Moody’s removing France’s triple-A rating yesterday, with bulls paying more attention to positive developments in Greece instead. Unless hopes evaporate for the US to avert the fiscal cliff, the market still favors a weak USD and a weak JPY environment.