Singapore dollar trades at $1.2208

An upcoming Fed meeting could lead to greenback weakness.

IG Markets Singapore said:

The Singapore dollar has held steady against the greenback over the weekend, although it has edged back over the $1.22 threshold.

The local currency is still suffering from the global caution amid the failure of the US government to agree on easing in $600 billion of budget cuts and tax hikes.

While this has kept risk assets capped this month, there is still a more positive tone coming out of global markets.

This was helped over the weekend by strong Chinese data for industrial production and retail sales which points to an economic rebound.

This morning the local currency trades at $1.2208. Tomorrow we have the start of a Fed meeting which could lead to some weakness in USD with more bond-buying on the cards.

DBS Group Research meanwhile noted:

We have upgraded our currency outlook for 2013. As witnessed during the recovery from the 2008 global financial crisis, many Asia ex Japan currencies can be expected to achieve new multi-year highs after this Eurozone crisis. Even the troubled Indian rupee is likely to find some stability as cyclical growth returns to provide some relief to the country’s structural challenges.

Our view hinges on several assumptions for 2013. On the world economy, the US must avert the fiscal cliff and China must return to an improving growth trajectory. The health of the world economy will depend on its two largest economies to offset the recessionary pressures in Eurozone and Japan.

On the currency front, the euro must be stable with the Chinese yuan resuming its appreciation bias. These assumptions will be underpinned by expectations for the advance economies maintaining their ultra-loose monetary policies over the next three years to complement deleveraging efforts.

Unlike the market, we see scope for the Asian Newly Industrializing Economies (ANIE) currencies – Taiwan dollar, Korean won, Singapore dollar and Hong Kong dollar – to outperform their Southeast Asian peers such as the Malaysian ringgit, Thai baht, Indonesian rupiah and the Philippine peso.

Our view is based on the assumption for the ANIE economies, with their stronger balance of payments surpluses, to close their growth differential with Southeast Asian countries.

With the Chinese yuan internationalization story shifting towards increasing capital account convertibility under the new leaders over the next ten years, speculation that HK may modify its HKD peg to the USD has started.

We believe that any imminent change is premature because the yuan liberalization process will be sequenced in two phases, first via the direct investment channel and, in the latter half of the leadership, through the portfolio investment channel.

With the US election over, China’s new leaders and Obama’s new administration are expected to continue work to rebalance the rebalance the global economy in the next four years. With the Fed keeping QE3 “unlimited”, with a pledge to keep US rates low into mid-2015, this will keep the yuan on an appreciation path, especially with China maintaining its vigilance against inflation.

Interestingly, the leadership changes in Asia’s two largest economies – China and Japan – are likely to see policies pushing their exchange rates in opposite direction. Japan’s snap election on this weekend, on December 16th, is likely to usher in a government bent on pushing for “unlimited” monetary easing and aggressive public works spending, which together, is hoped will weaken the Japanese yen.

Overall, 2013 is also likely to see emerging Asian currencies appreciating against the yen, as much as against the US dollar. Our new currency forecasts are located, where they have been and always will be, at the back of this daily publication.