[NEW YORK] The currency of Asia's highest-rated nation reflects a level of economic anxiety not seen since the region's financial crisis almost two decades ago.
Singapore's dollar is headed for a third straight quarterly loss versus its US counterpart, and surging forward rates imply that the currency will depreciate at the fastest clip since 1998.
That signals pessimism about growth and deflation across the region because the Singapore dollar is often traded in place of currencies that aren't as liquid. The island-state is one of Asia's main financial centres and its currency tends to be more resilient than peers from Thailand's baht to Indonesia's rupiah, making the bearishness even more significant.
"It's used as an Asian proxy," Rajeev De Mello, who oversees about US$10 billion as head of Asian fixed-income at Schroder Investment Management Ltd, said by phone from Singapore. "When the market was bullish on Asia and bearish the US dollar, the Singapore dollar did exceptionally well." Now comes "a reversal of that trade", he said.
Singapore's currency tumbled to a 41/2-year low of S$1.3941 to the US dollar on March 13, two days after a surprise interest-rate cut in Thailand and as data showed China's slowdown is continuing into 2015. It was at S$1.3875 at 2:45 pm Friday in Singapore.
Traders are betting further losses are in store. The gap between the Singapore dollar's spot rate and contracts betting on its value in six months increased to 0.0077 on March 10, the widest since 1998. The difference was 0.0073 on Friday.
The forward points rallying to levels not recorded since the Asian financial crisis mean the market expects the Singapore dollar to depreciate further, Goldman Sachs Group Inc analysts including Fiona Lake in Hong Kong and Reza Siregar in Singapore wrote in a March 10 report.
Because Singapore is the only Asian nation with triple-A ratings from all three major credit-grading companies, traders often use its currency to take a view on the region as a whole.
Its 4.4 per cent slide versus the US dollar this year - the third-worst performance among 11 regional peers - reflects investor concern that Asia may struggle to withstand an interest-rate increase this year from the Federal Reserve. Singapore is also afflicted by the same slump in manufacturing, real estate and exports that's hurting the rest of Asia.
"Singapore inflation is weak, domestic demand has softened and this undermines sentiment on local markets," said Dwyfor Evans, a Hong Kong-based macro strategist at State Street Corp. "But the root of this most recent bout of Singapore dollar weakness is the US dollar." The Singapore dollar's losses are all the more noteworthy because it's falling more than peers it tended to outperform in past crises.
It strengthened during the global crash of 2008 as other Asian currencies fell. In the Asian financial crisis of 1997-98, Singapore's currency dropped 15 per cent, about half the loss suffered by Thailand's baht and South Korea's won and a fraction of the 70 per cent decline in the rupiah.
On July 2, 1997, Thailand crumbled under the burden of foreign debt and capitulated on the baht's peg to the US dollar. The devaluation touched off a crisis across the region, leading to the collapse of Indonesian president Suharto's three-decade regime, while South Koreans lined up in the streets to donate their gold jewellery to the government as the won tumbled.
"While comparisons with 1997-98 are understandable, Asian currencies are no longer pegged and are doing their job as automatic stabilisers to the real economy," Callum Henderson, the global head of foreign-exchange research at Standard Chartered Plc in Singapore, said by e-mail on Friday. "Though we expect more gains in the dollar into the first Fed move, we look for some stabilisation and recovery in Asian currencies thereafter." While the situation isn't so dire this time around, Singapore's economy is hurting.
Its gross domestic product will grow 3.2 per cent this year, about half the average pace across Asia, economists surveyed by Bloomberg predict. The island-state is also suffering the worst deflation in more than five years, with consumer prices falling 0.4 per cent in January from a year earlier.
Singapore unexpectedly eased policy in January to combat this slump and debase its dollar. The Monetary Authority of Singapore (MAS) manages the currency against an undisclosed trade-weighted basket of peers, and guided the exchange-rate band lower in an attempt to boost the economy.
That weakened the currency in international markets, too. The local dollar weakened about one per cent in trade-weighted terms in the first two months of the year, according to a Bank for International Settlements gauge.
Goldman Sachs Group Inc and JPMorgan Chase & Co are bearish, predicting officials will further undermine the currency by lowering its target again in April. Bank of America-Merrill Lynch agrees, because the nation has been burning through its massive foreign reserves to support its current monetary stance.
"Further weakening of currency policy should be in the pipeline," said Anthony Chan, a sovereigns strategist in Hong Kong at AllianceBernstein LP, which manages US$474 billion. "The Singapore dollar has not really been attractive in the current cycle, especially on expectations the MAS would prefer to weaken the currency to support growth."