Singapore: More policy tightening likely, so brace for more SGD strength

Keeping room for further tightening

The Monetary Authority of Singapore (MAS) announced further policy tightening on Friday, in its fifth move in a year. Singapore’s central bank manages monetary policy through exchange rate settings, rather than interest rates, as trade flows dwarf its economy. The MAS therefore guides the path of the Singapore dollar (SGD) against an undisclosed basket of the currencies of its major trading partners. The central bank focuses on the level of the Singapore dollar’s nominal effective exchange rate, referred to as S$NEER, which it allows to move within a policy band.

So, three levers are used in MAS’ policy settings: the slope, the mid-point and the width of the policy band. These three inputs together allow the SGD to rise or fall against the currencies of its main trading partners. On Friday, the MAS re-centred the policy band higher without changes to the slope or the width of the band. With only one of the three levers being used, the move was potentially less aggressive than what some expected, but it was broadly in-line with the consensus. This measured move also leaves room for extending tightening into 2023 if needed, especially if inflation expectations rise following the GST increase in January.

Headwinds to growth remain

The advance Q3 GDP release of 1.5% q/q accompanied the MAS policy decision this morning, and it was a sigh of relief as technical recession was avoided after previous quarter’s -0.2% q/q. GDP growth came in at 4.4% y/y, smashing expectations of 3.5% and last quarter’s growth was also revised higher to 4.5% y/y. Key outperformance was noted in the services and construction sectors, as increasing tourism after the economy’s reopening continued to underpin further recovery in services demand.

Still, headwinds remain as the key manufacturing sector is still in doldrums, down another 3.3% q/q after turning mildly positive at 0.4% q/q in the second quarter. The effect of reopening is also likely to fade into 2023 as more economies such as Japan open their borders, and tourists get divided. Persistent inflation also highlights risks to consumer spending continue to escalate. The MAS expects price pressures to remain strong into the next year and sees upside risks to its projections which stand at 6% for this year and 5.5-6.5% for 2023. The MAS core inflation is expected at 4% this year, at the top of the 3-4% range forecast and 3.5-4.5% in 2023 after factoring in the GST increase.

Potential SGD strength and related winners & losers

SGD got a boost despite the lack of a double shot by the MAS, suggesting that the move is being interpreted as prudent, and not dovish, given the growth-inflation mix. The central bank will certainly remain data-dependent at this point, but the case for further SGD strength is still seen because

1. Markets are pricing in the Fed rate path much better and we are in the peak hawkishness phase now
2. Safe-haven status of the SGD makes it attractive in the recession/stagflation scenario
3. Saxo’s technical analyst Kim Cramer sees a long-term resistance at the 0.382 Fibonacci retracement of the 2001-2011 down trend around 1.45 for USDSGD. If USDSGD closes below 1.42 there is downside potential to the 0.618 retracement at 1.3980. Some support at 1.4078-1.4055

Further strength in the SGD is negative for travel/tourism stocks as it deters tourists to cheaper destinations like Japan. Also at loss will be the companies with a large share of revenues generated outside Singapore. Singtel (Z74:xses), for instance, derives over 50% of its revenues and 70% of its free cash flow from its Australian subsidiary, Optus which besides the currency pressure is also facing penalties on data breach. Likewise, Haw Par (H02:xses), which owns the Tiger Balm brand, derives only 12% of its revenues from Singapore and may be prone for FX losses.

Meanwhile, a stronger currency could be positive for importers with largely domestic operations. Sheng Siong (OV8:xses) is a consumer staples retailer, a sector that could thrive even in tough macro conditions. It has large imports and an expanding store footprint which, together with FX effects, could translate into a better top line trend.