Published October 6, 2009

Sing$ firms against US dollar as outlook improves

MAS expected to take neutral stance, without tightening band next week

By OH BOON PING

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(SINGAPORE) The Singapore dollar has risen substantially against the greenback amid the better economic environment in recent weeks. But private sector economists do not expect the Monetary Authority of Singapore to tighten its monetary policy stance next Monday.

Last month the Sing dollar broke out of its trading range of $1.44 to $1.46 per US dollar to hover around $1.41 - a 1.7 per cent gain since the start of September.

Yesterday the Sing dollar rose to a four-day high of $1.4117 against the greenback in early trading, compared with last week's close of $1.416.

Barclays economist Leong Wai Ho said: 'Singapore continues to attract significant net inflows into portfolio assets, as US interest rates remain close to zero. Forex reserves and the net forward forex position have gone up sharply.

'Also, the dissipation of deflationary expectations has pushed up the Sing dollar nominal effective exchange rate or NEER from 40 basis points above the mid to more than 80 basis points.'

UOB Treasury Research sees 'US dollar weakness against the major currencies, and gains in the commodity currencies - a barometer of risk - as some of the factors contributing to the Sing dollar's recent strength'.

The stronger exchange rate also comes as Singapore's economic conditions appear to have turned a corner and the outlook for next year has improved.

For example, the manufacturing sector performed better than expected in August, with factories here producing 12.3 per cent more than they did a year earlier.

Drug companies have led the way, with a 97.8 per cent surge in biomedical production versus last year.

The August production figures beat a consensus estimate of 5 per cent expansion, according to a Bloomberg poll of economists.

Similarly, the purchasing index (PMI) for August soared to 54.4 - its strongest reading since November 2006. The PMI also registered its fourth straight monthly gain after eight consecutive months of decline, and was an improvement on July's 51.5 mark.

Meanwhile, non-oil domestic exports rose a seasonally adjusted 1.3 per cent in August.

'The prognosis for exports is good as Singapore continues to benefit from the upturn in global demand,' said Barclays' Mr Leong.

For instance, the US ISM new orders index rose to 64.9 in August - a third straight monthly increase and the highest level since December 2004.

In Singapore, container throughput rose 2.5 per cent month on month in August - a third consecutive monthly rise on a seasonally adjusted basis.

'The next leg of the export recovery will be supported by rising prices,' Mr Leong said. 'For instance, the price of the most popular DRAM chip, the 1GB DDR2 DRAM, has risen 132.4 per cent since the beginning of the year.'

Still, economists say conditions remain fragile. 'Despite the strong momentum in the recent bounce, economic activity remains below pre-recession levels,' said Citigroup's Kit Wei Zheng.

Similarly, UOB points out that 'our full-year forecast of minus 3.3 per cent (GDP) for 2009 still ranks as the steepest decline since Singapore's independence'.

For this reason, private sector economists reckon MAS is likely to maintain a neutral stance next week and leave the Sing dollar trading band unchanged.

In Singapore, the monetary policy focuses on the exchange rate parity with major currencies, rather than the interest rates.

Citi thinks the central bank will adopt a wait and see approach for now, though a tightening next April is possible. 'This is the consensus call, but we should caution that early signs of inflation pressures mean the risk of a surprise pre-emptive tightening in October should not be completely ignored,' Citi said.

It forecasts a S$/US$ rate of $1.40 in Q4 and $1.37 in Q1 next year.

Barclays sees significant slack in the economy with no overheating pressures, and has forecast an exchange rate towards $1.40 by year-end.

DBS Group Research projects $1.41 in Q4 and $1.37 by end-2010.