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Singapore policy sage sees currency testing 2009 low amid easing

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The Singapore dollar is likely to slide to levels seen in the aftermath of the global financial crisis as the Monetary Authority of Singapore resumes easing policy in April. So says an analyst who's correctly predicted the last three central bank decisions.

[SINGAPORE] The Singapore dollar is likely to slide to levels seen in the aftermath of the global financial crisis as the Monetary Authority of Singapore resumes easing policy in April. So says an analyst who's correctly predicted the last three central bank decisions.

The authority, which uses the currency as a tool to manage the economy rather than interest rates, is set to lower the center of the band within which it steers the local dollar as Singapore's export-driven economy feels more pain from China's slowdown in 2017, according to Vaninder Singh, an economist at NatWest Markets, part of Royal Bank of Scotland Group Plc. The currency is set to weaken past S$1.45 against the greenback within the next six months, Singh said, a level last seen in August 2009.

A property downturn in China, Singapore's biggest trading partner, will hurt the Southeast Asian nation's prospects, said Mr Singh. That's at a time when growth is already under pressure amid a slowdown in global trade, with lower energy prices hurting the oil and gas services industry. The MAS stayed put in October, having eased at the first of this year's two scheduled meetings in April and twice in 2015.

"We're looking for a further slowdown in Singapore's growth," said Mr Singh, who is based in the city state. "There are a couple of headwinds that are coming from China." The Singapore dollar fetched S$1.4424 versus its US counterpart on Friday. It had sunk to S$1.4481 on Thursday, after the Federal Reserve raised interest rates and forecast a steeper path for borrowing costs in 2017.

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While Mr Singh's prediction is in line with the median estimate for the currency by end-June in a Bloomberg survey of analysts, options traders are more pessimistic as the currency heads for a record fourth annual decline.

The MAS guides the Singapore dollar against a basket of currencies and adjusts the pace of appreciation or depreciation by changing the slope, width and center of a band. It refrains from disclosing more details.

The premium traders pay for six-month options to sell the local dollar, compared with those to buy, widened to 1.26 percentage points, from a two-year low of 0.96 percentage point reached in November.

While the government in November cut the top end of its 2016 growth forecast to 1.5 per cent from 2 per cent, it said the economy will probably avoid a recession. The MAS said in October that inflation had "troughed," and stuck to the neutral stance of zero appreciation for the currency.

"There is this very interesting interplay between frustrating slower growth and stabilizing inflation," said Koon How Heng, a senior foreign-exchange strategist at Credit Suisse Group AG's private banking and wealth management unit in Singapore. "It's not that straightforward that the MAS may ease outright." The local dollar will probably slump to S$1.48 at the end of next year on the prospect of higher US interest rates and a weaker Chinese yuan, Heng said.

Australia & New Zealand Banking Group Ltd too expects Singapore's central bank to adjust the center of its policy band next year, said Khoon Goh, its head of Asia research in Singapore. Investors who are betting on a decline in the currency can take profit at S$1.50, he said.

Jason Wang, who has been advising his clients to buy the greenback in the past four years, is also bearish. The Singapore dollar will likely slide toward S$1.50 in the next six months, said the chief executive officer of Stamford Management Pte, a family office in the city state that oversees more than US$200 million for Asia's rich.

"Given the main pillars of growth within the Singapore economy are somewhat lackluster, the MAS should remain as accommodative for as long as possible," Mr Wang said.