Wrong calls for Singapore dollar's drop abandoned as rally holds

[SINGAPORE] After getting their forecasts for the Singapore dollar wrong twice this year, foreign-exchange strategists now say they've learned their lesson.

Instead of falling as predicted, the currency is powering toward its biggest monthly gain versus the greenback since January 2012, surging to records versus the euro and Malaysia's ringgit. Credit Suisse Group AG and Goldman Sachs Group Inc are among the banks that are now raising their estimates.

The surprise for prognosticators was the Monetary Authority of Singapore, which guides the currency rather than setting interest rates. After the central bank unexpectedly loosened policy in January, it refrained from adding more stimulus in April amid stronger economic growth and concern inflation will pick up later this year. That spurred bets the island state's era of easing is over almost before it began.

"The Singapore dollar was oversold and has room to appreciate," Charlie Chan, whose Singapore-based hedge fund returned 18 per cent last year through investing in currencies, stocks and bonds in Asia, said in an interview Thursday. "It is illogical to expect the MAS to do something again so soon after an inter-meeting decision to ease in January." Singapore's dollar has jumped 2.3 per cent against the greenback in April, snapping a nine-month run of losses that was the longest in 30 years.

While still forecasting a decline, analysts surveyed by Bloomberg have boosted their median year-end forecast for the currency to S$1.40, from S$1.42 as recently as April 13. The two-cent increase is the biggest such move since August.

Mr Chan, a former Credit Suisse Group AG proprietary trader who now runs Charlie Chan Capital Partners, said he added to positions earlier this month that would profit from gains in the Singapore dollar.

Risk reversals show traders are also becoming less bearish. The premium for one-month options to sell the Singapore dollar, compared with those to buy, touched 0.57 percentage point on Thursday from as much as 1.29 percentage points on Dec 24. It contracted to 0.51 on April 17, the narrowest since July.

Singapore's dollar slumped 1.1 per cent on Jan 28 when the MAS said in an unscheduled announcement it would seek a slower pace of currency appreciation. That followed the European Central Bank's decision to introduce bond purchases a week before, and rate cuts in Canada, Denmark and India.

Forecasters were divided on whether the MAS would follow up with more stimulus at the first of its two scheduled meetings for the year on April 14. When it refrained, the currency jumped 0.8 per cent.

The MAS guides the Singapore dollar against an undisclosed currency basket and adjusts the pace of appreciation or depreciation by changing the slope, width and center of a band. It doesn't disclose details on the basket, nor the band, nor the pace of appreciation or depreciation.

Credit Suisse increased its three-month target to S$1.39 from S$1.415 hours after the MAS's April 14 announcement. Goldman Sachs raised its year-end projection to S$1.40 from S$1.43 the following day.

Both companies also scrapped their forecasts for the central bank to ease policy further.

"Most likely, the MAS will keep its stance unchanged," said Michael Wan, an economist at Credit Suisse in Singapore. "What will cause me to change that view? It will essentially be growth."

Singapore's dollar advanced to S$1.4357 per euro on April 14, the strongest since the single currency began trading in 1999. It climbed to 2.7317 ringgit on April 16, the highest level in data compiled by Bloomberg starting in 1981.

Even after the April surprise, the top Singapore dollar forecaster maintained his view the currency will weaken to a five-year low of S$1.42 by Dec. 31 as the US dollar resumes its global rally.

"That's going to be a function of a stronger US dollar," said Charlie Lay, a strategist at Commerzbank AG in Singapore, who had the most accurate estimate in the last four quarters, according to Bloomberg's rankings. "We'll probably still look for some kind of easing by October, especially if growth and inflation surprise on the downside." ABN Amro Group NV, which had predicted the MAS would ease in April, now expects the Singapore dollar to weaken at a slower pace to S$1.36 at the end of June, from a previous forecast of S$1.38, said Roy Teo, a Singapore-based strategist at the bank.

"From a growth and an inflation point of view, it's less likely that the MAS may need to ease further in October," he said. "The sentiment toward the Singapore dollar will be less bearish in the short term."

BLOOMBERG

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