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Investors short Singapore dollar should prepare to take profits: Citi

Markets would look for a quick test of the lower bound of the Singapore dollar nominal effective exchange rate (S$NEER) trading band in order to calibrate their models, Citi's economists said on Wednesday after Singapore's central bank unexpectedly eased its monetary policy ahead of a scheduled review in April.

"The reduced slope of the NEER band is still positive, so the argument for being long SGD at the lower bound remains intact,'' Citi's economists said.

"Investors currently short SGD should prepare to take profits, while others may be better served waiting for the lower bound to be tested instead of adding short SGD exposure at this time,'' they added.

Earlier, the Monetary Authority of Singapore (MAS) announced that it would maintain the policy of a modest and gradual appreciation of the SGD NEER policy band, but the slope of the band would be reduced.

Following the shock announcement, the Singapore dollar sank to its weakest level since 2010, sinking as much as 1.3 percent to S$1.3569 against the greenback.

Citi's economists believe that SGD rates will not underperform once the lower bound of the NEER band is tested.

Having said that, they noted that the new slope is much harder to estimate until more time has passed. Citi had estimated that the slope of the band was at 2 per cent p.a. before the policy announcement.

"For now, we are penciling in a slope reduction to 1%, but acknowledge significant uncertainty. The MAS did not say it reduced the band slope "slightly"- a term typically used to denote a shift of 100bps magnitude. This either suggests a previous slope of 2.5%, or a new slope of around 0.5%,'' they said.

The economists said while they had expected a 30 to 40 per cent chance of a slope reduction in 2015, possibly in Apr, MAS latest move came as a surprise.

"The MAS has in the past "steered the NEER" between meetings (our base case for 2015), whilst making formal changes to the band parameters only at the scheduled policy announcement date. There have also been previous unannounced changes to the policy band (e.g. temporary band widening during the Asian Financial Crisis), but this is the first announced inter-meeting move, to the best of our knowledge.''


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