MAS’s move to strengthen SGD unlikely to be ‘game changer’ for USD/SGD upward trend: analysts
THE surprise off-cycle move by Singapore’s central bank to tighten monetary policy is unlikely to weaken the US dollar’s (USD) strength against the Singapore dollar (SGD), analysts said.
The USD saw a knee-jerk 1 per cent fall against the SGD about 20 minutes after the Monetary Authority of Singapore (MAS) made its off-cycle announcement, its second such move this year, to combat rising inflation, even as it raised its core inflation forecast range to 3-4 per cent, from 2.5-3.5 per cent.
MAS typically reviews its monetary policy twice a year, but since October last year, it has made 4 moves to change its Singapore dollar nominal effective exchange rate (S$NEER) policy band settings.
“We were not all that surprised to see another off-cycle tightening by the MAS as short-end rates have clearly signalled an intention to keep the currency on the stronger side. But we had expected the adjustment to happen after an inflation data release,” said Nicholas Mapa, senior economist at ING.
“Surging price pressures are driven by a mix of supply side and demand side factors, pointing to inflation heating up further in the near term,” he said.
While analysts believe the SGD is likely to remain a “regional outperformer”, even if in the short term, expectations of yet steeper hikes by the US Federal Reserve could constrain its performance against the USD, Standard Chartered analysts said.
Echoing those sentiments, Peter Chia, senior FX strategist at UOB said: “We continue to expect USD/SGD to trade higher, underpinned by the dominant and broad USD strength as a result of the Fed’s aggressive front-loading of its interest rate hikes this year.”
Still, MAS’s tightening stance is likely to slow the ascent of the USD/SGD, Chia told The Business Times.
“Worth mentioning, the dip in USD/SGD post the last 3 MAS tightening exercises in October 2021, January 2022 and April 2022 was brief and lasted 1 to 5 trading sessions before the USD/SGD resumed its uptrend,” he added.
OCBC rates strategist Frances Cheung said the SGD is likely to stay resilient at times of US dollar strength, which will put upward pressure on the S$NEER.
“The S$NEER is already trading around 0.7-0.9 per cent above the new midpoint, according to our model, which assumes a 1.5 per cent slope and a +/-2 per cent band,” she said. “The broader dollar strength will still limit the downside to USD/SGD, with the immediate support at 1.3871 and then 1.3800.”
DBS senior currency economist Philip Wee believes the central bank likely lifted the policy band by a quarter band or half a percentage point, which would lower the floor of the USD/SGD band to 1.382.
He added that he remains “comfortable” with his forecast for USD/SGD to hold below 1.40 this year.
