Singapore currency intervention seen in interbank rate above 1%

[SINGAPORE] The Monetary Authority of Singapore may be buying the local dollar to strengthen it, just two months after the city state joined a global wave of policy easings.

Singapore's interbank offered rate rose above one per cent on Tuesday for the first time since the global financial crisis in 2008. That signaled to the Commonwealth Bank of Australia that the MAS is being forced to intervene after its unexpected easing in January pushed the Singapore dollar to the bottom of its policy band, according to Andy Ji, a Singapore-based strategist for the lender.

The central bank, which targets the currency instead of interest rates to manage the economy, unexpectedly eased policy two months ago as growth slowed. The MAS guided the Singapore dollar lower against an undisclosed trade-weighted basket of peers. Goldman Sachs Group Inc and JPMorgan Chase & Co are among strategists that have predicted the central bank will will further undermine the currency by lowering its target again at its scheduled meeting in April.

"Tighter liquidity condition from FX intervention already saw short-end rates spike sharply above their US dollar counterparts," Mr Ji wrote in a note on Tuesday.

"We expect MAS to widen the policy band to an unspecified width."

The three-month interbank offered rate rose to 1.00129 per cent in Singapore Tuesday, from 0.99216 per cent on Monday, extending its advance to a record 23 days, according to data from the Association of Banks in Singapore. The Singapore currency was down 0.1 per cent to S$1.3662 per dollar as of 4:20 pm in Singapore.

The MAS adjusts the Singapore dollar's pace of appreciation or depreciation against an undisclosed trade-weighted basket of currencies by changing the slope, width and center of the band. The central bank said on Jan 28 it would reduce the slope of the policy band, while keeping a "modest and gradual appreciation" in it. It made no change to the width and level at which it is centered.

International Monetary Fund data on Singapore's international reserves show long positions in foreign-currency forwards and futures dropped to US$38.3 billion in January, down 8.4 per cent from December. The MAS has been intervening to support the nation's currency and running down its forward book "quite dramatically," according to a note from Bank of America-Merrill Lynch on March 17.

Commonwealth Bank of Australia predicts that the Singapore dollar will extend its decline to S$1.44 by the end of the year, the lowest level since 2009. It slumped to S$1.3941 on March 13, the weakest level since July 2010.

Consumer prices fell 0.3 per cent from a year earlier in February, data released in Singapore Monday showed. That's the fourth straight month of declines, the most extensive slump since the second half of 2009. Singapore's 10-year bond yield declined 11 basis points to 2.34 per cent.

BLOOMBERG