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S$ falls 2% to S$1.36 from month high after Yellen's speech, but rates still weak

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The Singdollar (S$) fell to S$1.361 on Monday at 2.29 pm, almost 2 per cent lower from the month high of S$1.338 on Aug 16.


THE Singdollar (S$) fell to S$1.361 on Monday at 2.29 pm, almost 2 per cent lower from the month high of S$1.338 on Aug 16. The fall follows last Friday's highly anticipated speech from US Federal Reserve chairwoman Janet Yellen.

It wasn't just the Singdollar which fell. As expected, most Asian currencies were lower after Ms Yellen raised expectations of an interest rate hike next month following months of improving US economic data.

"I believe the case for an increase in the federal funds rate has strengthened in recent months," Ms Yellen said last Friday.

At S$1.361, the local unit is back to a level last seen - albeit briefly - on July 25.

But local interest rates continue to be weak on abundant liquidity, which is unusual.

"SOR or swap offer rate tends to move higher when USD/SGD moves higher. Discrepancy now may be due to flush of local liquidity," said Roy Teo, ABN Amro Bank's senior forex strategist.

The three-month Sibor which is used to price home loans was unchanged at 0.87191 per cent, a 12-month low, a level it reached on Aug 19. The three-month Sibor is now some 30 per cent lower than the year's high of 1.254 per cent on Jan 19.

The more volatile three-month SOR, which is used to price commercial loans, fell to 0.70780 on Friday from 0.75276 per cent the previous day.

Said DBS Bank economist Eugene Leow of the divergence of stronger US dollar and yet weak local interest rates: "Firstly, markets seem reacting to the prospect of an impending Fed hike quite well for now. It is unclear if this will last.

"Secondly, domestic liquidity is abundant and the market is anticipating S$7.7 billion worth of SGSs (Singapore government securities) to mature on September 1. These two points provide downward pressure on Sibors and SORs."

Selena Ling, OCBC Bank economist, noted that demand for bonds remains strong as the Singdollar remains a safe haven currency and so this would cap upside for Singdollar interest rates.

The global search for yield, especially for credit over equities, and local demand for Singdollar bonds remain intact, said Ms Ling.

Monday's two-year SGS bond auction, for instance, fetched a median yield of 0.83 per cent and demand was strong at 2.29 times, she said.

"This would suggest that the upside for short-term SGD interest rates should remain capped in the near term," said Ms Ling.

Both DBS and ABN Amro expect the Singdollar to weaken in the coming months. "DBS expects USD strength to be dominant in the coming months," said Mr Leow.

DBS and ABN Amro have US$/S$ at 1.40 by the end of the year.

Mr Teo said the case for a weakening Singdollar in the next few months has two catalysts.

If the Fed does hike rates next month, it would reduce the odds of an easing by the Monetary Authority of Singapore (MAS) in its October policy meeting, he said.

The market believes the MAS wants a weaker Singdollar to help exporters who are struggling with high costs. "(If) Fed does not raise rates, (it) will increase odds of MAS easing in Oct," he said.