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Singdollar volatile, with more instability ahead

But economists say the bigger question for the market is the overall trajectory of the yuan
Friday, January 8, 2016 - 05:50
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The recent turbulence in Singapore's corporate bond market is unlikely to subside in the next 12 months, a note from ratings agency Standard & Poor's (S&P) said on Thursday.

Singapore

THE Singdollar was pretty volatile on Thursday, falling as much as 0.6 per cent at one stage as further yuan weakness roiled currency and equity markets.

The SGD fell to the day's low of 1.4427 in the morning against the greenback, and then recovered somewhat to 1.4319 at 3.20pm; it was quoted at 1.4353 at 4.41pm, said Bloomberg. On Wednesday, it closed at 1.4344.

The Singapore currency has fallen one per cent against the US dollar since the start of this year. It depreciated 7 per cent in 2015.

The volatility was played out amid tumbles in other currencies and equity markets, following a second day of weaker-than-expected yuan fixing by China's central bank.

The substantial fall in RMB central parity fixing triggered another bout of volatility in global financial markets, as worries about China's economic outlook and further depreciation of the RMB are back in the spotlight, said a note from United Overseas Bank.

The People's Bank of China on Thursday set the RMB fixing at 6.5646/USD, 0.5 per cent below the 6.5314 fix of the previous day, the biggest percentage and point drop since Aug 13 (amid central parity mechanism reform) and after three consecutive days of a 0.2 per cent move, it said.

Analysts say the SGD will continue to be whipsawed by the yuan's movements.

DBS Bank economist Eugene Leow said: "I think it's better not to read too much into the daily fluctuations as market sentiment has been volatile.

"The bigger question for the market lies with uncertainties over the trajectory of the RMB." He added: "A weakening trajectory may negatively impact Asian currencies, including the SGD."

Asian equity and FX markets are taking their cue from China, said Selena Ling, OCBC Bank economist. "There probably was a knee-jerk reaction to the CNY (also known as the yuan and the RMB) fixing this morning," she said.

"Our model estimate is SGD NEER (nominal effective exchange rate) traded closer to the weaker side of the band this morning, but it has since retraced somewhat intraday, albeit still in the weaker half of the band," she said.

"I think we can expect China to continue to be a source of volatility for Asia, including Singapore, in the days ahead."

UOB expects the SGD to weaken to 1.46 by the end of the second quarter, and then to recover to 1.42 by year-end.

DBS projects the SGD to fall further to 1.47 by the end of Q3 before steadying to 1.46 at end-2016.

SGD interest rates remain elevated. The three-month Sibor (Singapore interbank offered rate) was unchanged at 1.19125 per cent, the same level it has been since Monday, a jump from 1.13535 at end-2015.

The three-month SOR (swap offer rate) has been sliding. It was 1.61350 per cent on Wednesday, off the 52-week high of 1.7 per cent on Dec 31, 2015.