Sing dollar to weaken, local interest rates to rise now that policy statement is out

NOW that the policy statement is out of the way, the Fed dependent Singapore dollar and local interest rates will move as expected, weaker and higher respectively, as the US hike rates sometime later this year, say analysts.

Where the pundits differ is the number of hikes the US Federal Reserve will take before the year is over.

Before Thursday's policy move by the Monetary Authority of Singapore to a zero per cent depreciation, the Singapore dollar (SGD) had strengthened against the US dollar (USD) almost 5 per cent to S$1.35 from the Jan 15 high of S$1.44. It plunged by a cent to S$1.36 after the policy statement was released.

Effectively, the SGD NEER (nominal effective exchange rate) has shifted back into the lower half of its new neutral band, said Philip Wee, DBS Bank senior currency strategist.

"In USD/SGD terms, this points to a 1.35-1.38 range as of this morning. The outlook for the USD/SGD will, in the end, still be dictated by the USD's direction against its trade-weighted basket of currencies," said Mr Wee.

Looking ahead, we will probably need to pay more attention to the Fed, he said.

The DXY (USD) Index bounced off its intra-day low of 93.627 on April 12 to 94.744 on Wednesday. At its low on Wednesday, the DXY effectively returned all of the appreciation seen in October-November 2015.

Mr Wee said that two Fed presidents - John Williams (San Francisco) and Jeffrey Lacker (Richmond) - suggested on Wednesday that the market may be too dovish in their Fed hike expectations.

Both see last year's hike in December more representative of the Fed's intention to normalise monetary policy. Mr Williams does not expect a lot of volatility from Fed hikes, suggesting lesser concern about global risks.

Mr Lacker also cited less concern on the effect of a strong USD on US growth, said Mr Wee.

"Put simply, DXY needs to start moving back up from the floor of its 93-100 range for USD/SGD to rise above 1.40 again."

The MAS's latest move is unlikely to have a significant impact on the SGD, said a note by Maybank.

"But it will add to SGD volatility and push domestic interest rates higher because it may signal the perception that MAS may continue to ease given the marginal easing move this time round."

Nonetheless, given the easing bias and the signalling, we expect the market to revise some of its view based on the perception of possible further easing, it said.

Maybank is looking at USD/SGD to hit 1.385 in Q4, while ABN Amro has a year end USD/SGD forecast of 1.40.

As for local interest rates which had weakened considerably the past three months, analysts said the softness is over.

The three-month Singapore interbank offered rate (Sibor) used to price home loans had fallen to one per cent from 1.25 per cent on Jan 19. It was little changed on Thursday. The more volatile three-month swap offer rate (SOR), used for commercial loans stood at 0.85 on Wednesday, it has more than halved from the Jan 13 high of 1.76 per cent.

MAS surprise policy easing does increase the probability that SORs may have seen their lows for the year, said a note by United Overseas Bank. UOB said that its Q4 forecast for the three-month Sibor and three-month SOR remains unchanged, at 1.50 per cent and 1.70 per cent respectively.

Most of the downdraft in the Sibor and the SOR over the past few months was due to the weak USD trend as the market pushes back on Fed hike expectations, said Eugene Leow, DBS economist.

This downdraft on SGD rates appears to have dissipated with USD strength reasserting on Wednesday and the MAS shifting to neutral (aligned with DBS's expectation, but against consensus expectations), he said.

"As the SGD weakens against the USD, some upward pressure on SGD rates have appeared.

When the market refocuses on Fed hikes, USD strength could become more apparent and USD interest rates should rise," said Mr Leow.

DBS still has three Fed hikes pencilled in for the year, he said.

The current soft patch of Sibor and SOR rates retracement was overdone since it was largely driven by the unwinding of the USD strength story from Q4 2015, said OCBC Bank economist Selena Ling.

"Our house view remains that the Fed will attempt to hike another two 25 basis points this year and current market is underpricing this risk, hence the current period of calm since March in the FX-cum-interest rate environment may not sustain into summer," said Ms Ling. Our year-end three-month Sibor and SOR forecasts remain at 1.3 per cent and 1.35 per cent respectively, she said.