Traders await effects of QE3

The local currency remains stuck in a tight trading channel as the big catalysts expected in Q3 have all occurred, says IG Markets Singapore.

IG Markets Singapore said:

The Singapore dollar remains stuck in a tight trading channel against the greenback as the big catalysts expected in Q3 have all occurred.

While central banks have very little left to give, traders await the effects of QE3 and what impact it will have in Asia. This could boost the local currency against a debased USD.

But at the same time the Monetary Authority of Singapore could be looking to slow down the Singapore dollar’s appreciation against the greenback, cancelling out some the debasement effect.

A strong local currency isn’t good for exporters, who have been struggling with demand from the eurozone. This morning USD/SGD trades at $1.2236.

DBS Group Research meanwhile noted:

Today’s Singapore inflation report should reinforce a lesser need to keep the exchange rate policy band on an accelerated appreciation pace. The Monetary Authority of Singapore (MAS) is scheduled to hold its next policy review before mid-October.

CPI inflation is expected to further retreat to 3.8% YoY in August from 4.0% the previous month. Until July, inflation had been stubbornly high between 4.6% and 5.7% since end-2010.

With inflation lower, attention can now turn towards the economy and ensuring that the strength of the currency does not compromise competitiveness.

As of this morning, the SGD NEER is about 5.7% stronger vs a year ago levels. This is well above the 2.0% YoY real GDP growth rate in 2Q12.

More importantly, non-oil domestic exports contracted 10.6% YoY in August, with the weakness particularly visible in electronics. Retail sales were also negative YoY for two straight months in June and July.

Hence, the Singapore dollar nominal effective exchange rate (SGD NEER) policy band should not deviate too far from the middle of its policy band, with its upside capped by the mid of the upper half of the band.

In USD/SGD terms, the trading band for this week should be between 1.2203 and 1.2323, assuming that its trade-weighted basket of currencies does not fluctuate too much this week.