[SINGAPORE] The Singapore dollar fell almost one per cent yesterday, just hours after US Federal Reserve Chair Janet Yellen announced unexpectedly that interest rate hikes could kick in early next year.
The SGD at one point fell 101 points to $1.2750, before recovering slightly to $1.2730. Further weakness is expected. While local interest rates did not move, they are likely to rise in line with hikes in the United States, which could come as early as the fourth quarter of this year, some economists said.
Home buyers should start relooking their loan packages if they are on floating rates, while importers may want to think about hedging their forex exposure, they advised.
Roy Teo, ABN Amro Bank senior FX and precious metals strategist, said after Ms Yellen implied that the Fed could start hiking interest rates about six months after tapering concludes later this year, it pushes potential upside risk in USD/SGD towards this year's high of 1.2830.
"As the US economic growth momentum picks up later this year, the USD is expected to rise towards 1.30 against the SGD," he said.
The Fed said it would continue trimming its asset purchases and cut its monthly purchases of US Treasuries and mortgage-backed securities to US$55 billion from US$65 billion, after it assessed that the recent weakness in the economy stemmed from adverse weather.
United Overseas Bank (UOB) economist Francis Tan said that although the SGD would continue on an appreciating path against most of the currencies of its trading partners such as the ringgit, the trend would be different for the USD/SGD pair.
"We expect the SGD to weaken to 1.29 by end of the second quarter and to 1.33 by end of the fourth quarter this year," he said.
On interest rates, Mr Tan said the risk was that markets usually moved ahead of expected official policy, so US and Singapore interest rates could rise by Q4.
US Fed officials said the short-term rate could rise to one per cent at end-2015 and at 2.25 per cent by the end of 2016, from 0-0.25 per cent now.
"We can also expect some market volatility to set in in the second half of this year as the financial market tries to pre-empt the Fed by moving ahead of the curve at least six months earlier," said Selena Ling, OCBC Bank head, treasury research & strategy.
UOB's Mr Tan forecast that by year-end, the key three-month Singapore interbank offered rate (Sibor) would rise to 0.56 per cent from 0.402 per cent now, and to 0.78 per cent by the end of Q1 next year.
"It is a reminder that rate normalisation in Asia is inevitable and will happen sooner than markets have expected," said Barclays senior Singapore economist Leong Wai Ho.
Asian economies which are more in sync with the improving US business cycle will see their output gaps close faster and be in a position to hike sooner, he reckoned.
"In Singapore, when US rates are lifted to one per cent by end of 2015, we can expect three-month Sibor to climb by 30 basis points at least," said Mr Leong.
Home buyers on floating rate home loans - about 70 per cent of borrowers - will be affected by the higher interest rates, said UOB's Mr Tan.
Floating rate loans are typically pegged to the three-month Sibor.
"Rates may go up faster than we think," he warned.
Ms Ling felt that interest rate normalisation is positive for Asian economies.
"We think that Yellen's remarks are on balance net positive for Asia in that a stronger US economy, even if accompanied by US interest rate normalisation down the road, should benefit economies and businesses in Asia, especially on the export and manufacturing front," she said.
Importers should consider hedging their US dollar exposure, said Mr Tan.
Tom McCabe, DBS Bank head of global transaction services, said three questions on currency exposure come to mind: Do I need to hedge my cost base or my expected revenues; will the increase in cost of USD-priced goods reduce demand for my products or services; and are any of my suppliers or buyers at risk because of currency fluctuations.
"For companies doing business across Asia, these questions apply to all currencies, not just USD," he said.
The impact on asset pricing will be different however, said Ms Ling.
In the near term at least, there will likely be some volatility in interest rates, bonds, equities and currencies though investors do not need to panic, she said.
"It is better to wait for the knee-jerk market reaction to stabilise and watch for opportunities to hedge any floating rate exposure where relevant.
"The Sing dollar, for its part, will likely trade off the stronger US dollar dynamics as well, like other Asian currencies, but the trade-weighted basket provides a partial anchor of sorts."
Not all think the SGD will slide that much as the Monetary Authority of Singapore (MAS) is likely to maintain its modest and appreciating stance given inflationary pressures here.
The SGD will not be excessively weakened, given the keeping of MAS's "modest and gradual" SGD appreciation stance, and continued trade-related inflows on a recovering US economy, said Leong Sook Mei, Asean head of global markets research, Bank of Tokyo-Mitsubishi UFJ.
"The only prolonged period of SGD depreciation in recent times from the 1.4 to 1.8 handle were during the 1997-2001 Asian crisis and dot-com bubble periods. USD/SGD should go back down towards 1.2600 by year-end," said Ms Leong.