Published April 7, 2009

MAS may soften stance given weaker economy

The central bank is due to release its policy review in the coming 2 weeks

By LARRY WEE

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(SINGAPORE) In response to what could turn out to be the worst ever year in Singapore's economic history, the Monetary Authority of Singapore is expected to soften its trade-weighted Singapore dollar stance this month.

Which way? Citigroup researchers argued that the Singapore dollar's REER has actually appreciated since the start of 2009, thus tightening domestic monetary conditions in the Republic

The MAS is expected to release its semi-annual monetary policy review within the next fortnight. In October last year, it moved from a policy of modest and gradual appreciation to a neutral policy stance for the trade-weighted Singapore dollar or S$NEER, citing a deteriorating external environment and moderating prices pressures.

At the time, Sing-watchers correctly predicted that the US dollar could be lifted to S$1.55 levels this year, and by early March this year, it peaked at S$1.5579 before falling back.

But it could go higher yet, currency strategists warn, perhaps besting that high by mid-year and even reaching S$1.60 by end-2009, based on forecasts that the local economy could contract 5 per cent or more this year.

For example, Nizam Idris, UBS director of currency research, expects to see the greenback up at S$1.57 by mid-year and S$1.60 by end-2009.

'The big question of course is when will the US dollar and euro start to weaken, but I am basing my predictions on the assumption that the US dollar and euro will still be well-contained by the end of this year, at say around US$1.25 per euro.'

Unlike its last review, when the MAS left the mid-point as well as the width of its trading band unchanged, many expect the MAS to at least re-centre its band lower this month.

In a mid-March report, Citigroup researchers, for example, argued that the Singapore dollar's REER (or real effective exchange rate) has actually appreciated since the start of 2009, thus tightening domestic monetary conditions in the Republic - at a time when they should instead be loosened to offset the magnitude of the external shocks hitting the local economy.

They cited, for example, news that both industrial production and non-oil exports had already plummeted a record 29.1 per cent and 34.8 per cent respectively as early as January this year - the sharpest falls on record.

Indeed, Citi is one of several that suggest that the MAS may have now helped to move the S$NEER to the lower end of its allowed - but undisclosed - trading bands via intervention activity in 2009, and expect the MAS to announce that it would re-centre those bands lower at this month's review - a move that could lift the greenback quite a bit versus the Singapore dollar.

And depending on how other currencies which make up the trade-weighted basket are moving, this could translate into a downward move of 1.5 to 1.6 Singapore cents in the S$NEER. That in turn, may result in a two-three Singapore cent upward move in the US dollar-Sing dollar on the day of the announcement.

This, Citigroup researchers explained, would be consistent with the previous upward recentring on April 10 last year, when the US dollar moved down two Singapore cents.

UBS's Mr Idris believes that the MAS may effectively re-centre the mid-point of its bands at the current policy floor, which is where he calculates the S$NEER has moved to currently.

In addition, he suggests that the MAS may also widen those bands, from an estimated 2 per cent at present, to a wider 3 per cent on either side of its new mid-point. This, he explained, would make a lot of sense in terms of accommodating any unexpected changes in price trends - inflationary or deflationary spikes - ahead of its next meeting in October.

Researchers at Standard Chartered Bank, however, believe that the MAS may well keep its neutral stance unchanged, arguing that in current global economic conditions, it may not help much, since export weakness is these days much more a demand-side issue than a price competitiveness issue. However, they do expect the US dollar to peak higher first, at S$1.57 by mid-year, before ending the year closer to S$1.48.

That said, they acknowledged: 'A key risk to our call is an implicit depreciation through a one-off re-centring by the MAS, especially if the S$NEER trades near the policy floor for a sustained period leading up to the April 2009 review.'

Ever since the early 80s, the MAS has finetuned the value of the S$NEER within an undisclosed policy band as its main policy tool, given the very open nature of the local economy. The calculation of the S$NEER is in turn based on a basket of currencies weighted according to their importance to Singapore as trade partners. The most important currencies in this basket are believed to include the US dollar, Malaysian ringgit, the euro and the yen.