Fitch Solutions forecasts Singdollar averaging S$1.35 against USD in 2018, S$1.38 against USD in 2019

FITCH Solutions Macro Research has revised its average forecast for the Singapore dollar this year to S$1.35 per US dollar, down slightly from S$1.36, on the back of forces like the US-China trade tensions and rising US interest rates.

Its analysts also say the Singapore dollar will remain range-bound against the US dollar in the next three to six months between S$1.36 per US dollar, and S$1.38 per US dollar in the near term.

But 2019 could see a lift to average S$1.38 per US dollar, it forecasts.

The Singapore dollar is currently at S$1.375 per US dollar, having already depreciated 1 per cent against the US dollar since July, and bringing the year-to-date average for 2018 to S$1.34 per US dollar.

Besides the trade war and interest rates, another concern is the pressure faced by the export-oriented manufacturing sector: Fitch Solutions said the Nikkei Singapore manufacturing purchasing managers' index posted a reading of 49.6 in September, the first contraction since April 2016.

As a counterforce, Fitch Solutions expects the Monetary Authority of Singapore (MAS) to maintain the relative strength of the Singapore dollar in the coming months as it aims for price stability in the medium term - seen from the MAS's decision to steepen the slope for the appreciation of the Singapore dollar nominal effective exchange rate (S$NEER) during its October meeting.

However, in the longer term or in six to 24 months, "the Singapore dollar is likely to receive tailwinds from the combination of a strong external balance sheet and subdued inflationary pressure due to the government's prudent monetary and fiscal policy framework", the research report said.

One factor is the report's prediction that inflation will average 1.6 per cent over 2019 to 2020, lower than the US's 2.3 per cent.

"The combination of the MAS's gradual appreciation in the Singapore dollar and the use of macro-prudential measures should enable the authorities to ensure price stability over the medium term by keeping imported inflation at bay and contain the increase in house prices," the report said.

Other factors include the Republic's strong external and public finances.

But risks include a significant slowdown in global economic expansion especially in the US should the trade tensions manifest in a severe trade war, which could lead to Singapore's economy slowing significantly and "a sharp depreciation".

Fitch Solutions is part of Fitch Group, which also owns Fitch Ratings. Their research and commentary are independent of each other.