Singdollar slides, local interest rates remain weak

Singapore

THE Singdollar (SGD) fell on Tuesday and is now back to its early-June levels, but local interest rates remain weak on ample liquidity, as inflows make their way to the resurgent region.

The SGD fell to S$1.3687 against the US dollar from S$1.3637 on Monday, on the back of broad-based USD strength; it was also influenced by the battered sterling and lower euro amid the markets' worry about a hard Brexit.

The SGD is pegged to a basket of currencies, but it tends to follow the majors like the USD, sterling, yen, yuan and euro, said Philip Wee, DBS Bank senior currency strategist.

Sterling fell to US$1.2764, its weakest since June 1985, following an announcement by British Prime Minister Theresa May that the country will start negotiations by March next year to leave the European Union.

Local interest rates remain weak, though as there is ample liquidity in the system, with capital inflows drawn to the region. Normally, as the SGD weakens, interest rates would rise since investors would need an incentive to hold the currency.

In the first half of this year, when the SGD was moving towards its year's high of S$1.3374 on June 23, the swap offer rate (SOR) fell accordingly.

But that relationship has broken since August.

In fact, the three-month SOR fell below three-month USD London Interbank Offered Rate (Libor) from Aug 10 - unprecedented since September 2014.

The three-month SOR, which is used to price corporate loans, fell to 0.62 per cent on Monday, from last Friday's 0.67 per cent.

The more stable three-month Singapore interbank bank offered rate (Sibor), used to price mortgages, was unchanged at 0.87 per cent on Tuesday.

DBS Bank economist Eugene Leow said: "Ample domestic liquidity conditions and Asia foreign exchange strength are the main reasons driving the three-month SOR lower."

Improving South-east economies such as Indonesia, the Philippines and Thailand continue to attract capital inflows, and this is keeping rates down, he added, noting that more Asian economies have reported faster than slower growth.

Funds meant for the region benefit Singapore because "it is still the place to park and manage funds", said Mr Wee.

The Thai and Indonesian stock markets are the best performing in Asia. In the year to date, the Stock Exchange of Thailand has risen 17 per cent; the Jakarta Composite Index is up 19 per cent.

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