3-month SOR jumps to 1.54% on continued China economic weakness

Singapore interest rates have jumped again as Asian currencies get hammered by continued economic weakness in China.

The 3-month swap offer rate (SOR) was quoted at 1.54 per cent on Tuesday, a rate last seen in December 2008. At 1.54 per cent, the 3-month SOR which is used to price commercial loans has jumped 10 per cent from a week ago and has more than tripled from 0.48 per cent on January 19.

The 3-month Singapore interbank offered rate (Sibor) was unchanged at 1.07 on Wednesday though it is higher than 1 per cent from a week ago. Sibor is used to price home loans.

"Fears on the Chinese economy remains the key driver behind persistent Asia FX (foreign exchange) weakness versus the majors (currencies)," said Eugene Leow, DBS Bank economist.

Latest China official Purchasing Managers' Index fell to 49.7 in August from the previous month's reading of 50.0, the weakest showing in three years.

"Buffeted largely by external headwinds and heightened risk aversion, upward pressure on already elevated SORs has not abated," said Mr Leow.

DBS expects the USD/SGD to hit 1.45 by mid-2016. The SGD on Wednesday weakened further to S$1.4131 from S$1.4104 on Tuesday with bets gaining that the Monetary Authority of Singapore may ease policy next month.

"The dynamics governing SOR are largely unchanged; weaker currency expectations, higher US interest rate expectations and exacerbated by episodes of capital outflow fear," said Victor Yong, United Overseas Bank rate strategist.

The market turmoil, fall in commodity prices and China risks have resulted in an adjustment in its major currency forecasts, said ABN Amro Bank research in a September 1 note.

On the SGD, it said that it had initiated short Singapore dollar view against the US dollar since August 18.

"The Monetary Authority of Singapore (MAS) is likely to shift its current modest appreciation of S$NEER (nominal effective exchange rate) policy to neutral in October. The SGD is also vulnerable to a weaker Chinese yuan and firmer short-term yields in the US. We expect the SGD to decline towards 1.46 against the US dollar later this year," said ABN Amro.

In fact ABN Amro said an interim monetary policy meeting by the MAS in September to widen the trading band cannot be ruled out if volatility in currency markets rises after the September 17 US Federal Open Market Committee meeting.

The recent sharp spikes in SOR is reminiscent of the Nov-Dec 2014 period when the 3-month SOR also surged from around 0.25 per cent to 0.93 per cent in early Jan 2015, said Selena Ling, OCBC Bank economist.

Other periods of elevated volatility was in 4Q08 during the Great Financial Crisis, as well as in 2H04 when the US Federal Reserve was embarking on its rate hike cycle, noted Ms Ling.

"A confluence of factors could continue to drive the domestic short-term rates for now - SGD NEER weakness and the market speculation of a further policy easing in October, coupled with paying interest in interest-rate swaps in anticipation of a rising interest rate environment precipitated by the US Fed normalising policy," said Ms Ling.