Singapore dollar slips against the greenback

FX traders reversed their positions on the likelihood of QE3, says IG Markets Singapore.

IG Markets Singapore said:

The Singapore dollar slipped against the greenback as FX traders reversed their positions on the likelihood of QE3.

This time yesterday currency markets were reacting to Fed minutes as though another round of asset purchases was a foregone conclusion, which saw weakeness in the US dollar.

But 24 hours is a long time as a currency trader. This morning we are back to square one with no real clues as to if and when QE3 will happen now as the Fed minutes are deemed to be out-of-date.

This saw some strengthening in the greenback against major currencies. It edged up to $1.2481 against the local currency having sat above $1.25 yesterday.

Singapore inflation eased last month to 4%, its lowest reading in 20 months. Although this is unlikely to change the MAS policy of slowly appreciating the Singapore dollar.

DBS Group Research meanwhile noted:

Inflation in Singapore finally fell meaningfully below 5% YoY mark. On a seasonally-adjusted term, CPI inflation eased to 4.1% YoY in July, its lowest level since November 2010.

When this happened in the past, especially in an adverse global environment, the Singapore dollar fell. The two most notable experiences after the 1997/98 Asian crisis were the 2001 global tech crisis and the 2008 Lehman-led global financial crisis.

During those periods, external weaknesses brought the Singapore economy into recession, and led the exchange rate policy back into a neutral stance. Currently, the official 2012 target for inflation is still high at 4.0-4.5% and GDP low at 1.5-2.5%.

Without the risk of an outright recession, there is little rationale to abandon the policy of appreciating SGD nominal effective exchange rate policy band. The fall in inflation should, however, be sufficient to open the door for a modest easing at the October policy review in the form of a flattening in the slope of the band.