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Sing dollar too strong: DBS currency strategist

Wednesday, August 2, 2017 - 15:10

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THE Singapore dollar (SGD) is too strong as the greenback continues to struggle and is becoming oversold, said Philip Wee, DBS Bank senior currency strategist. Year to date, the SGD has gained over 6 per cent against the US dollar (USD), and with the Thai baht are the two strongest South-east Asian currencies.

THE Singapore dollar (SGD) is too strong as the greenback continues to struggle and is becoming oversold, said Philip Wee, DBS Bank senior currency strategist. Year to date, the SGD has gained over 6 per cent against the US dollar (USD), and with the Thai baht are the two strongest South-east Asian currencies.

The SGD stood at 1.3597 on Wednesday, slightly off its year high of 1.3553 on July 31.

USD/SGD came under heavy selling pressure in July, and it has lifted the SGD nominal effective exchange rate (NEER) into the strongest quartile of its zero appreciation policy band, he said on Tuesday.

The SGD is "too strong", said Mr Wee, referring to the SGD NEER being in the strongest quartile of its neutral policy band.

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"This was inconsistent with Singapore's lacklustre economic and inflation data," he said.

The strength of the SGD has attracted strong capital inflows, so much so that 2017 was the first year since 2013 that foreign reserves increased in Singapore, noted Mr Wee.

Total foreign reserves have risen to US$266.3 billion in June 2017, the highest since US$273.1 billion at end-2013, according to the latest Monetary Authority of Singapore (MAS) data.

Since the start of 2017, the USD has been under pressure over disappointing US developments, as well as a strong euro, said Mr Wee. Year to end-July, the US dollar index has depreciated 9.1 per cent to 92.863. The US dollar index is now near the floor of its two-year range seen before the the US presidential election last November.

Among the major currencies, the euro has been the best performer this year - up 12 per cent against the USD - which began as a relief rally from positive French election outcomes in April-May easing EU break-up fears. The next bout of euro strength in June-July was attributed to a markedly more upbeat EU growth/inflation outlook by the European Central Bank.

The euro holds the largest weigh of 57.6 per cent in the US dollar index.

As for Asian currencies, it has been a good year so far with the exception of the Hong Kong dollar and the Philippine peso.

The South Korean won and the Taiwanese dollar led the appreciation in North-east Asia while the Thai baht and the SGD led in South-east Asia.

"These currencies share a common trait - healthy current account surpluses. One should note, however, that whenever these currencies have appreciated by 6 per cent year-to-date, they typically run out of steam," said Mr Wee.

In the case of Taiwan and South Korea, this has led to export competitiveness. In Thailand and Singapore, currency strength was unwelcome because of low inflation, he said.

Despite the SGD strength, the MAS is expected to maintain its neutral stance for its SGD NEER policy at its next review in October, said Mr Wee.

That is because trade is improving globally, and the SGD NEER is still inside its policy band," said Mr Wee.

"Based on where our growth/inflation is, the SGD NEER should be closer to the mid-point rather than the ceiling of its neutral policy band," he said.

USD/SGD should start to stabilise between 1.3370 and 1.3820 in H2 2017, said Mr Wee.

SGD strength is unlikely to continue unabated as another 5 per cent gain in the second half of 2017 is "too excessive", said Heng Koon How, United Overseas Bank head of markets strategy.

He expects the strong capital inflows into Singapore to slow down in the second half as the USD begins to recover.

The US Federal Reserve is poised to start balance sheet reduction (BSR) soon and coupled with another expected interest rate hike in H2, the USD should start to recover, and "chances are that strong inflows into Singapore will moderate", said Mr Heng.

He also said that the MAS will stay pat in its October review as the SGD NEER, while it has risen some 1.3 per cent above the mid-point, is within range.

"I don't see any incentive to tighten or loosen the SGD," said Mr Heng.

"Given the SGD's sensitivity to ongoing Fed policy tightening and the possible start of BSR, we can expect some gradual weakness in the SGD," he said.

"As such, we see renewed SGD weakness from 1.36 to 1.42 by Q2 2018."

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