Singapore dollar takes a breather

IG Markets Singapore says the local currency has been given a slight respite from the pressure of investors flocking to safe-haven funds.

IG Markets Singapore said:

The Singapore dollar has been given a slight respite from the pressure of investors flocking to safe-haven funds such as the greenback.

Yesterday the US dollar broke through the $1.29 barrier against the local currency trading as high as $1.2939 as traders feared for the global economy with weak US and Chinese economic data.

However it has slipped slightly leaving the pair trading at $1.2848 this morning.

This risk-off trading has been the theme for the last month since Greece failed to elect a pro-bailout government. The Singapore dollar has come under a lot of selling pressure as traders exit Asian currencies during these uncertain times.

However, many are positioning themselves short USD/SGD as the Monetary Authority of Singapore wants to appreciate the local currency against the greenback in the short to medium term to curb inflation.

GFT meanwhile noted (for 4 June 2012 trading):

Is the U.S. dollar losing its luster? It is no secret that the desire for safety drove investors into the arms of U.S. Treasuries and U.S. dollars throughout the month of May. Better than expected economic data made the dollar appear like a ruby in the rubble that everyone wanted to own.

Unfortunately the world’s appetite for dollars changed after Friday’s abysmal non-farm payrolls report. Investors are rethinking their strategy of buying dollars blindly now that they know the U.S. economy faces as much risk as the Eurozone.

Less than a month ago, everyone including some Fed Presidents believed that the U.S. central bank would sit on the sidelines and watch the ECB ease but now they will need to spring into action and join in on the move.

In fact, there is even a possibility that the Fed could increase asset purchases before the ECB if the Europeans decide to keep policy steady this week. For the second consecutive trading day, the dollar weakened against the euro as traders adjust their monetary policy expectations.

If the CFTC surveyed speculative EUR/USD positions today, net short positions would have undoubtedly been pared from record levels. The 0.6 percent decline in U.S. factory orders certainly didn’t help the appetite for dollars.

Slower growth in Europe and Asia negatively affected the confidence of businesses and demand for U.S. goods. Non-manufacturing ISM is scheduled for release tomorrow and we expect this report to confirm the slowdown in U.S. growth based on the pullback in labor demand and manufacturing activity.

The question now is whether the dollar will still be an attractive safe haven currency. If Europe’s sovereign debt crisis continues to intensify with no resolution in sight, then the answer will be yes because the EUR/USD will still be punished for being the source of the world’s problems.

However if European policymakers announce a plan to shore up finances and confidence in the region, then the need for safe haven currencies will diminish, encouraging investors to move out of U.S. dollars and into riskier currencies.

The broad based rally in currencies and the lack of material losses in U.S. equities today suggests that investors are holding out hope for a resolution to the crisis.

RBS, on the other hand, reported (for 4 June 2012 trading):

The EUR rose back above 1.25 briefly during the US session with little in terms of a catalyst, though the general flow of news headlines suggested that EU officials are working towards harmonized policy on EU banks, which could have aided the rally.

A report that the G7 finance ministers and central bankers will hold a conference call on the EU debt crisis may have also boosted optimism over joint action to stem the crisis. Ahead today is the RBA meeting. While there are external concerns that could factor into the RBA's decision, we think domestic data has been mixed to slightly positive in the last month, with few signs of significant domestic bank funding stress.

We think the RBA will keep its policy rate unchanged, particularly ahead of key GDP and employment data later this week, which could offer near-term support for the AUD given expectations and net-short AUD positioning per the latest IMM data.

But in this scenario, given the external pressures and in light of the RBA's recent rate cut decision, we think the RBA could make a dovish statement saying it is prepared to respond to weaker global factors or risks from Europe, which could mitigate some of the near-term bounce in AUD.