Singapore dollar trades at $1.2287

Asian currencies are being uplifted by hopes that central bank liquidity will find its way in local markets.

IG Markets Singapore said:

The Singapore dollar edged below the $1.23 threshold against the USD as traders took on a more confident pose last night.

While weak manufacturing data was published across global markets it showed an improvement on the previous month’s data.

This lead to a more bullish tone and saw risk currencies gain on the greenback.

The Sing Dollar moved off the $1.23 handle to sit at $1.2287 this morning.

Asian currencies are also being uplifted by hopes that central bank liquidity will find its way in local markets.

DBS Group Research meanwhile noted:

Downside pressures remain intact for the AUD/USD ahead of today’s Reserve Bank of Australia (RBA) meeting. Consensus expects the cash target rate to stay unchanged at 3.50% for the fifth straight month. A rate cut is considered a possible but improbable outcome.

Domestic factors remain mixed. While the unemployment rate eased to 5.1% in August from 5.2% a month earlier, the labor force participation rate fell to 65 in August, its lowest level since November 2006.

On the other hand, the TD Securities inflation gauge rose quickly in two months to 2.4% YoY in September from its low of 1.5% YoY in July.

Nonetheless, the 90-day bill interest rate futures remain convinced that there will still be at least one more rate cut over the next 12 months. The expectation is driven mainly by external factors such as the weak world economy and the general monetary easing trend globally.

With Australia’s real GDP growth slowing to 3.7% YoY in 2Q12 from its peak of 4.3% in the previous quarter, AUD bulls are particularly concerned about China’s slow growth and its negative implications for Australia’s mining boom.

Hence, the RBA’s assessment of two factors – China’s growth prospects and AUD’s overvaluation – will be closely watched.

On the latter, note that the country’s trade balance has returned to a deficit position after two years of surpluses. In fact, falling commodity prices are also viewed as a major hurdle to the government missing its goal to return to a small budget surplus in FY2012-13 ending June.

Overall, AUD/USD has been range-bound mostly between 0.97 and 1.07 after September 2011, when the Eurozone crisis started to dominate financial markets.

With the AUD/USD currently around 1.0365, and speculators still holding very long Oz positions, the risk reward suggests more downside than upside risks for the currency.