Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
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Macro/FX Watch: Singapore’s MAS could struggle to aid SGD recovery
Charu Chanana
Chief Investment Strategist
Summary: Singapore’s Monetary Authority announces its policy decision on Friday and would likely keep its policy settings unchanged amid upside risks to inflation and the global higher-for-longer narrative. However, room for SGD appreciation is limited as it trades near the top of the SGD NEER band. Strength in the Singapore dollar will need to wait for a clearer turn in US dollar or a pickup in Chinese yuan.
The Monetary Authority of Singapore (MAS) will announce its next decision on October 13. The MAS policy decision encompasses three aspects – midpoint, slope and width – of the SGD NEER policy band to determine the range in which SGD can trade against a basket of currencies. The last decision in April saw Singapore’s central bank keep all three parameters unchanged after tightening in three separate decisions since April 2022.
Since the April 2023 announcement to keep policy unchanged, the US economic momentum has surprised on the upside and inflation has come down but the 2% target remains elusive. Most global central banks, as a result, continue to stick with the higher-for-longer narrative. Meanwhile, China’s economy continues to remain muddled with property sector woes and uninspiring pickup in consumption. This could mean MAS would have room to keep its policy settings unchanged this week, and maintain the current estimated appreciation of 1.5% per annum in the SGD NEER which brings some level of tightening.
Domestically, Singapore’s inflation has eased from a peak of 7.5% YoY in August 2022 to 4.0% YoY in August 2023 but remains higher than pre-covid levels. Upside risks remain from food and energy prices, as well as the GST increase to 9% effective next year. On the growth front, Singapore narrowly escaped a recession after Q2 GDP growth printed +0.1% QoQ after a decline of 0.4% in Q1. But recent PMI and retail sales have surprised to the upside and a services led recovery continues amid post-covid rise in inbound tourism. Manufacturing sector however continues to pose headwinds, together with weakening global growth outlook, which suggests that the next MAS move will likely be that of easing, but it may be too early to get any signals on that yet given the next MAS meeting is in April 2024.
USDSGD has traded higher to 1.3764 amid the strength of the US dollar and the spillovers from a weak yuan. SGD is likely to remain weak as long as the USD strength continues, but a recovery may ensue later this year or next year particularly if China’s stimulus actions bring a recovery in economic momentum. If the MAS stays on hold, SGD should stay supported by room for appreciation is limited as SGD NEER is trading close to the upper band. Technicals suggest USDSGD could rise to 61.8% retracement at 1.3934 before dollar loses steam but a recovery in SGD may ensue if the long dollar positioning starts to be challenged.
Market Takeaway: Limited room for SGD to rally on a hold decision from the MAS as SGD NEER trades near the top of the range.
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