Three-month SOR jumps to 1.4%, highest level since Jan 2009

Singapore

THE three-month swap offer rate (SOR) has jumped again. It was quoted at 1.40236 per cent on Tuesday, a level last seen in January 2009.

Used typically to price commercial loans, the three-month SOR has risen sharply since China stunned the market with its yuan devaluation on Aug 11. The three-month SOR stood at 1.07461 per cent on Aug 11.

Another key local interest rate, the three-month Sibor or Singapore interbank offer rate, typically used to price home loans, was unchanged at 1.00208 per cent on Wednesday.

"Most of the SOR moves are FX (foreign exchange) related," said Eugene Leow, DBS Bank economist.

"Increasingly, the market is coming to terms that the RMB (yuan) will be on a weakening trajectory. As the RMB weakens, the market is speculating that there would be further Asia FX (including the Singapore dollar) declines versus the dollar," he said.

"This development is putting upward pressure on Singapore dollar rates."

The Singapore dollar on Wednesday was quoted at S$1.4012 to the greenback. It was at S$1.3881 on Aug 10.

Selena Ling, OCBC Bank economist, said the sharp jump in SOR rate is due to a bit of panic. "I think there's a fair bit of panic and over-reaction in the risk assets at this juncture," she said.

The SOR is reacting to the Asian FX weakness, specifically the Singapore dollar and the attendant speculation of a further Monetary Authority of Singapore (MAS) policy easing, post-yuan devaluation regime change, and some anticipation that if crude oil prices take another leg down this could pave the way for most central banks to pull off their hat-trick as happened in January, said Ms Ling.

Back in January this year, several central banks including the MAS weakened their currencies due to the significant change in inflation outlook following weak oil prices. Oil prices had fallen to US$47 a barrel in January from US$84 a barrel in October 2014.

Brent lost 10 US cents to US$43.11 a barrel on Wednesday as of 0110 GMT after it settled up 52 US cents at US$43.21 a barrel in the previous session, reported Reuters.

"SORs have been caught up in a negative feedback loop between emerging market weakness and fear of outflows," said Victor Yong, United Overseas Bank rates strategist.

In such an environment, sentiments on Singapore dollar invariably get caught up with regional woes, said Mr Yong.

"Downgraded currency expectations have since resulted in higher SORs, with overshooting by forced US dollar hedging further exacerbating the moves," he said.

A Bloomberg report on Tuesday said some Chinese agencies involved in economic affairs have begun to assume in their research that the yuan will weaken to 7 to the US dollar by the end of the year, citing people familiar with the matter.

The research further factors in the yuan falling to 8 to the US dollar by the end of 2016, according to the people, who asked not to be identified because the studies haven't been made public, said the report.

A US dollar-yuan rate of 7 would be a more than 8 per cent depreciation from Tuesday's level. At an Aug 13 briefing on the yuan, People's Bank of China deputy governor Yi Gang dismissed the idea that China would devalue the yuan by 10 per cent to boost exports, calling it "nonsense".