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Quick takes: Singapore Q1 GDP up 2.1%, MAS keeps S$ on appreciating path

Facade of the Monetary Authority of Singapore (MAS) building.

SINGAPORE's Ministry of Trade and Industry (MTI) announced early Tuesday that the economy grew by 2.1 per cent on a year-on-year basis in the first quarter of 2015 based on advance estimates, the same rate of growth as that achieved in the previous quarter.

On a quarter-on-quarter seasonally-adjusted annualised basis, the economy expanded at a slower pace of 1.1 per cent compared to the 4.9 per cent in the preceding quarter.

At the same time, the Monetary Authority of Singapore (MAS) kept the Singapore dollar on a "modest and gradual" appreciating path, with no change to the slope and width of the policy band and the level at which it is centred.

Due to market speculation that the central bank would further ease monetary policy, the Singapore dollar (SGD) appreciated by almost one per cent against the US dollar to below 1.3620 after the surprise announcement.

Here are some comments by economists:

Michael Wan, Credit Suisse economist:

"Based on our growth forecast set (Credit Suisse: 3.2 per cent, consensus 3.1 per cent), we don't see the MAS changing policy moving into October.

"While there continues to be likely near-term headwinds on growth, given higher interest rates and soft property market activity, we continue to see growth picking up in 2H of 2015 for two key reasons. First, global growth is expected to improve going forward ... Secondly, stronger government spending on infrastructure, for instance, in projects such as the Changi Airport expansion and the building of MRT lines, should limit downside risks to construction activity from the weak property market."

Kit Wei Zheng and Gaurav Garg of Citi:

"Market implications: The Singapore dollar has appreciated as short positioning capitulated, although positioning reduction last week may limit the extent of the subsequent move. The Singapore dollar has now converged towards the mid-point from about -63bp before the policy. We do not expect investors to position for additional MAS easing until closer to the next policy review in October, so Singapore dollar price action is likely to be dominated by broad US dollar moves instead."

Tim Condon, head of research, Asia at ING:

"The data lead us to revise our full-year GDP growth forecast to 2.9 per cent from 2.8 per cent (Bloomberg consensus 3.0 per cent).

"We reiterate our year-end 1.43 USDSGD forecast (latest 1.37, Bloomberg median 1.41, forward 1.38) and 3.2 per cent 10-year SGS yield forecast (latest 2.04 per cent, Bloomberg median 2.75 per cent).''

Roy Teo, ABN Amro senior FX strategist:

"Though short term technical indicators imply that the SGD is in near overbought territory, further unwinding of SGD short positions could push prices towards 1.3525. In the medium term, we continue to favour fading any gains in the SGD towards 1.3450 for a year end target of 1.40 against the US dollar (USD).

"With the euro and Japanese yen (both constituting almost 25 per cent of SGD trade weights) expected to extend its weakness against the USD, the S$NEER is projected to extend its gains should the SGD remain resilient against the USD and other Asian currencies. This will result in further downward pressure on import prices and weigh on export price competitiveness.

"Last but not least, financial markets are underestimating the pace of rate hikes in the US this year in our view. This will provide further support for the USD to strengthen towards 1.40 against the SGD later this year.''

Gaurav Garg, Siddharth Mathur and Wei Zheng Kit, Citi economists:

"The MAS policy statement was unexpectedly hawkish, noting that the global outlook has 'improved slightly' on a stronger recovery in the G3, which should provide a mild uplift to externally oriented sectors in Singapore.

"Beyond the kneejerk price action, structural factors like growing resident outflows; shift away from local currency deposits to foreign currency deposits and ongoing restructuring may limit the extent of SGD strength versus its trading partners. Moreover, as Fed lift-off draws closer and USD strength becomes more entrenched, SGD may not be able to sustain its appreciation.

"Accordingly, we discourage investors from chasing the move lower in USDSGD. We do not expect investors to position for additional MAS easing until closer to the next policy review in October, so SGD price action is likely to be dominated by broad USD moves instead.''

Selena Ling, OCBC economist:

"We still look for full-year 2015 growth at 2.5 per cent, which is at the lower end of the official 2-3 per cent forecast, with headline and core inflation forecasts intact at 0 per cent and 1 per cent yoy respectively.''

Irvin Seah, DBS economist:

"The weakest link was the manufacturing sector. Overall output from the sector fell by 3.4 per cent YoY or 2.3 per cent QoQ saar. This shouldn't come as a surprise. With four consecutive months of below 50 readings in the PMI and an equally dismal industrial production output growth of -1.2 per cent YoY on average between Jan-Feb, a contraction in manufacturing growth is almost a given.

"More importantly, pockets of downside risks in the global economy still exist. Exports to the top three markets - US, Eurozone and China - may have bottomed but signs of a pickup remain elusive. The outlook for the manufacturing sector will essentially remain tepid in the coming months as external headwinds remain strong.

"In sum, outlook for the three key trading partners - China, Eurozone and Japan - is expected to remain dicey while the recovery in the US economy has been slow. Nothing in the external environment suggests an improvement in growth momentum in the near-term. Overall GDP growth forecast for 2015 remains at 3.2 per cent but we see downside risks ahead.''

UOB economists:

"As for now, we think that Singapore's core inflation (a key variable that the MAS looks at when deciding policy actions) will likely remain within the MAS's forecast of 0.5 per cent to 1.5 per cent for the rest of this year. That means that we think they will keep policy unchanged at current levels in October 2015 decision.

"Our expectations for the US interest rate normalization remains (that the Fed will likely start the normalization in the upcoming June FOMC) and maintain our USD/SGD end 2015 forecast at 1.40, from the 1.3614 currently.''

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