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SGD continues to fall, giving up almost all of this year's gain against USD

THE Singapore dollar continues to fall and is near to giving up all of this year's gain following a stronger than expected surge by the US dollar on Tuesday.

The Singapore dollar is within striking distance of returning this year's appreciation against the US dollar, said Philip Wee, DBS Bank FX strategist, on Wednesday

On Wednesday, the SGD fell to 1.3348 from 1.3317 on Tuesday as the USD powered higher against almost all G-10 and Asian currencies. It has been a volatile four months for the SGD. It rose to a high of 1.3063 on Jan 26 before bouncing around 1.31 the next three months.

"Once it falls past the 1.3360 level it ended 2017 at, the SGD will start to depreciate for the year," said Mr Wee. Our target remains for the SGD to fall to 1.38 this year, he said.

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Although Singapore returned to a mild appreciation stance for its exchange rate policy on April 13, "we did not subscribe to the consensus view for USD/SGD to fall below 1.30", he said.

"Last year the USD was weak because the eurozone and China were strong, this year the table has flipped, the US is looking better," he said.

"Since the start of 2018, we believed that it was a matter of time before the US dollar recovers on America's improved growth/inflation/rate outlook relative to its peers (eg eurozone, Japan, UK) in the DXY (USD index) basket of currencies," said Mr Wee.

This view has gained traction with the US 10-year bond yield returning close to 3 per cent, he said.

Another indication of US strength is that the market interest rates have moved faster than the Fed Fund Rate, he said.

Since December, the US Federal Reserve has raised rates twice for a total of 50 basis points, bringing it to 1.75 per cent while the three-month Libor, or the London interbank offered rate, has gained 80 basis points to 2.36 per cent, Mr Wee noted.

DBS' view that the SGD will continue to weaken is also predicated on four rate hikes by the US Fed this year and another four in 2019.

"The market is looking for another four hikes over the coming two years, while we think that another seven hikes are coming over the same period," said Eugene Leow, DBS rates strategist.

Notably, the current environment is very different from that in 2015 and 2016, when the Fed started those years expecting to hike four times but only delivered one, he said.

"Back then, the global economy was facing considerable challenges and oil prices were plunging, keeping a lid on inflationary pressures," he said.

In 2017, things changed with the synchronised recovery taking hold, allowing the Fed to hike by 75 basis points.

Global growth is still doing reasonably well, but the "Goldilocks" conditions are now gone as the focus turns towards overheating or inflationary risks, said Mr Leow.

"As US core CPI and CPI hover above 2 per cent amid a rapidly tightening labour market, we think that the Fed is going to move towards restrictive monetary policy, allowing short-term rates to temporarily head above neutral with the upper bound of the Fed funds rate touching 3.5 per cent by end-2019."

Other FX strategists think the SGD weakness is temporary and that the local currency will resume its strength to end the year as high as 1.27.

This view is based on the likelihood of other central banks tightening their monetary policy in the second half of the year as inflation picks up in line with higher commodity and oil prices.

Expectations of a more aggressive Fed have probably resulted in a reduction in short-USD against long-SGD positions as market positions for a stronger USD in the near term, said Maybank in its April 30 FX note.

"Consequently, the SGD has slipped 0.9 per cent versus the USD month-to-date in April. Still, we remain positive in the SGD in the next six-to-twelve months but expect some weakness in the SGD in the near term," said Maybank, which is projecting the SGD to rally to 1.27 by end-2018.

Generally, Maybank thinks that higher energy and commodity prices as well as tightness in labour market in other parts of the developed world including UK, Australia and eurozone should feed through to inflation and bring back the case of monetary policy convergence at a later stage.

"This scenario would see other currencies' strength play catch-up," it said.

Bank of Singapore currency strategist Sim Moh Siong's end-2018 forecast is 1.30. The recent SGD weakness is more of a USD story rather than SGD story per se, said Mr Sim.

"The USD is breaking out of the range-bound trading since February but this does not suggest a turn in the medium-term USD downtrend, he said.

While the dovish tilt by major non-US central banks likely started the unwind of short USD positioning, "we still see the USD as threatened by 'twin deficits' and maturing US business cycle concerns in the medium-term", he said.

United Overseas Bank sees the SGD ending the year at S$1.32. (see amendment note)

Amendment note: The article has been amended to reflect that United Overseas Bank expects the SGD to end the year at S$1.32 instead of S$1.30 as previously stated.