MAS may reduce S$NEER policy band to neutral: analyst

Re-centering the band remains unlikely for now.

The Monetary Authority of Singapore (MAS) will likely reduce the slope of the S$NEER policy band to a zero appreciation trend in the upcoming 30 March meeting, OCBC Treasury Research said in a note. The width of the band is not expected to change.

The main policy dilemma is whether there is a need to re-center the policy band lower to help boost the local economy, said OCBC FX strategist Terence Wu. He noted that during the global financial crisis (GFC), the policy band was only lowered towards the tail-end of this economic slump, in April 2009.

Wu said that re-centering is unlikely, at least for now. “Whilst such a double move may be required from a macro perspective, the time path of SGD NEER itself does not point to such an action.”

A change in the policy center also occurs when it is at or very near the extreme end of the band.

Singapore’s full-year growth is expected to come at 0.5% YoY, with the hit from the coronavirus pandemic expected to come at H1 2020. “Our own analysis suggests that the output gap may open up significantly in Q2, to levels not seen since the 2008-09 GFC,” noted Wu.

In the FX space, USD-SGD will be unable to resist the former’s strength and higher pull, and is expected to float higher. However, the SGD should be able to draw support from the RMB complex.

“Although the firm RMB itself also exerts a negative pressure on the SGD NEER, the RMB complex serves as a shield to prevent Asian currencies (SGD included) from excessive downside against the USD and other G-10 currencies,” noted Wu.