Singapore dollar stuck below $1.225

Traders exercise caution over the US’ ability to avert the fiscal cliff.

IG Markets Singapore said:

The Singapore dollar remains is a tight trading range as traders exercise caution over the US government’s ability to avert the fiscal cliff.

The local currency is stuck in a channel that has not seen it break out of $1.22 - $1.225 this month. This morning it sits at $1.2224 against the greenback.

The start of tax hikes and spending cuts the US is facing next year is the top concern and is keeping a lid on any rise in market confidence. Asian currencies have suffered as a result.

The US fiscal fears will continue to remain a major risk for FX trader throughout this month and likely to last into December.

A change in leadership in China happening this month is also likely to add to the cautious trading plaguing FX markets currently.

DBS Group Research meanwhile noted:

The DXY (USD) index has appreciated to 81.117 yesterday from 79.919 at end-October. This was above the 81.040 close seen on September 6. Effectively, the USD has taken back all of its losses incurred between the announcements of the European Central Bank’s Open Market Transaction (OMT) Scheme and the US Federal Reserve’s QE3.

Ironically, the USD has been drawing support from US fiscal cliff worries pushing US equities lower. The US budget deficit was wider at USD120 bn in October, the first month of the new FY2012/13 ending September 2013, compared to the USD98.5 bn shortfall in October 2011. Moody’s warned that America would lose its triple-A debt rating if Congress fails to come up with a long-term plan to reduce the federal debt/GDP ratio.

For now, the fiscal debate on the numerator is centered on whether the Republicans are willing to agree to the Democrats’ push to end tax cuts for higher income earners. Support for the denominator appeared to be in the Fed’s court. Fed Vice-Chairwoman Janet Yellen yesterday supported keeping US rates low into 2016.

Yet, conventional wisdom tells us that the USD cannot sustain its rise. A twin deficit position needs to be supported by capital inflows to prevent the balance of payments from deteriorating. The willingness of foreign investors to view US government bonds as safe haven assets will also depend on US inflation staying low.

Unfortunately, the troubled euro is viewed as a poor alternative for the world’s largest reserve currency. This probably partly explains why there has been some risk diversification from major currencies into surplus-led emerging Asian currencies, where foreign reserves have started to post new record highs again. Notably, these Asian currencies have appreciated against many of their European counterparts this month.