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Sing dollar surges after Jackson Hole; local interest rates gain too
THE Singapore dollar, as expected, surged on Monday against the greenback in line with other currencies following a meeting of central bankers in Jackson Hole over the weekend which gave no clue on monetary policy.
As the US dollar sank, the Singapore dollar rallied to S$1.3553 from last Friday's S$1.3594.
Year to date, the Singapore dollar is almost up 7 per cent, and is back to levels seen last September.
"Yes, the USD encountered wholesale widespread selling after Jackson Hole. As a result, USD/SGD fell back below 1.3600 to 1.3550," said Heng Koon How, United Overseas Bank head of markets strategy.
Technical indicators suggest that some near-term support can be found around 1.3540/45, followed by 1.3500, he said.
Mr Heng continues to believe that the US dollar will recover later in the year, and his forecast for USD/SGD by end of this year remains at 1.40.
"We believe markets are getting complacent on the risks of a Fed rate hike in December, as well as announcement of balance sheet reduction," he said. The Federal Open Market Committee (FOMC) has said previously that it plans to unwind its US$4.5 trillion balance sheet soon.
But OCBC Bank economist Selena Ling thinks otherwise, and is projecting an even stronger Singapore dollar by year-end.
"At this juncture, there is still a fair bit of uncertainty revolving around the FOMC's intentions, be it the unwinding of its balance sheet in September this year or its interest rate trajectory - note the futures market pricing of odds for a third hike by December 2017 is still relatively low at 1/3 probability due to the lack of inflation conviction," said Ms Ling.
Moreover, US President Donald Trump's perceived ability to push through policy reform, whether it be health care, tax and/or infrastructure stimulus, have largely dissipated, she noted.
"The weak USD theme could persist for a bit longer in our view. Our end-2017 USD/SGD forecast is 1.3413, assuming the Monetary Authority of Singapore remains static at the October MPS (monetary policy stance) since both growth and inflation parameters are proceeding as projected," said Ms Ling. The MAS said earlier this month that its monetary policy stance remains as announced in April.
The local short-term interest rates also rose - which was not exactly expected as a strong Singapore dollar encourages inflows.
The three-month Singapore interbank offered rate (Sibor) on Monday rose to 1.12375 per cent, up 0.00025. The three-month swap offer rate (SOR) on Friday was up a stronger 0.04552 to 1.02255 per cent, back to December levels. The SOR is updated in the evening.
The short-term interest rate gyrations are a function of liquidity and currency expectations going ahead, said Ms Ling.
Said Eugene Leow, DBS Bank interest rates strategist: "Higher Sibor and SORs are probably a reflection of tighter SGD liquidity. With SOR being inordinately low for some time compared to the Sibor, some catch-up is finally taking place."
"Another way to look at this is that USD/SGD forwards are not necessarily agreeing with the spot market, thereby breaking the link between FX (foreign exchange) and interest rates," said Mr Leow.
UOB's Mr Heng said that higher Sibor and SOR are mostly due to liquidity management by local firms ahead of the holiday-shortened month-end.
"This reinforces our expectation that local rates will gradually inch higher."