US$ finishes the day one per cent weaker at just above S$1.50
By LARRY WEE
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(SINGAPORE) Against a backdrop of falling prices and weaker growth both at home and abroad, the Monetary Authority of Singapore (MAS) yesterday re-centred its exchange rate policy band at current (weaker) levels, but retained its neutral policy stance, and left the width of its undisclosed trading bands unchanged.
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'In our assessment, the current level of the S$NEER is appropriate for maintaining domestic price stability over the medium term, taking into account the prospects for growth in the Singapore economy,' Singapore's central bank explained in its semi-annual monetary policy statement yesterday morning.
Singapore dollar strategists here estimate that the MAS move yesterday meant a de facto depreciation of something like 1.5 to 2 per cent for the S$NEER or trade-weighted Singapore dollar. Despite that, traders suggested that the weight of oversold positions going into the announcement saw the local currency strengthen - rather than weaken - versus the greenback.
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Such positioning prior to the news was in turn based on an expectation in some quarters that the MAS could have announced a larger de facto depreciation of up to 4 per cent for the S$NEER.
JPM researchers, for example, explained that based on their estimates, oversold Singapore dollar positions before the announcement may have been as high as 2.9 times their annual average.
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Shortly after the announcement, therefore, Reuters data recorded a two-month low of S$1.4953 in Asian currency trading - a good two cents lower than their morning high of S$1.5165 - and the trade-weighted Singapore dollar has reportedly moved into the stronger half of its new trading band. By the Asian close, the US dollar was trading just a shade above S$1.50, for a net loss of one per cent compared to Monday's Asian close.
Currency writers at Standard Chartered Bank and OCBC also pointed out that the last part of the MAS statement yesterday may have unnerved Singapore dollar bears too.
Singapore's central bank confirmed that the S$NEER has been trading in the lower half of its policy band over the past six months but added: 'The Singapore economy continues to be anchored by sound fundamentals and a resilient financial system. There is therefore no reason for any undue weakening of the Singapore dollar.'
Singapore's advance Q1 GDP report released yesterday certainly provided a good reason for the MAS to make a downward adjustment in its targeted S$NEER band.
It was estimated that the Singapore economy saw its worst-ever quarter on record in the first three months of 2009. And the official estimate for 2009 growth has now been lowered to -6 to -9 per cent.
But explaining why the MAS did not adjust the S$NEER more sharply downward, JP Morgan currency strategists suggested: 'A more radical policy action may have been viewed as counter-productive in terms of operational policy band management and currency reserves preservation, as it could beget yet further market expectations for S$NEER depreciation against the band.'
Looking further ahead, Stanchart predicted: 'We expect the S$NEER to move back to the weak half of the policy band over the next few months as Singapore goes through the deepest part of the current recession in H1 2009, and as the MAS is likely to maintain its neutral FX stance in October 2009.
'We therefore maintain our underweight short-term currency rating on the Singapore dollar, and forecast the US dollar at S$1.57, S$1.52 and S$1.48 at end-Q2 2009, Q3 2009 and Q4 2009.'
Likewise, Barclays Capital researchers suggested that the local economy may have bottomed out: 'Already, in emerging market Asia, there are signs that both exports and industrial production are starting to stabilise in March, as global trade finance conditions improve.'
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