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SGD bounces slightly after fiscal blast

The beleaguered Singapore dollar (SGD) rallied on Friday, after Deputy Prime Minister Heng Swee Keat unveiled a massive fiscal injection as the economy careens towards recession.


THE beleaguered Singapore dollar (SGD) rallied on Friday, after Deputy Prime Minister Heng Swee Keat unveiled a massive fiscal injection as the economy careens towards recession.

The SGD touched 1.4249 against the greenback on Friday afternoon - stronger by 2.7 per cent from a trough of 1.4650 on March 23 - before retreating to 1.4348 as at 5pm. But, with the central bank all but certain to loosen Singapore's exchange rate-based monetary policy in a matter of days, watchers cautioned that the SGD spike will be short-lived. Returning to a softer SGD is necessary as the broad economic weakness cannot sustain the currency strength, even with fiscal support from a S$55 billion Resilience Budget, they added.

The Monetary Authority of Singapore (MAS) is expected to slacken its stance next Monday, with a shift to a neutral-appreciation bias for the SGD a foregone conclusion in the market.

The analysts are also debating whether the MAS could take a further step to push down the mid-point of the SGD policy band, as the Covid-19 pandemic hammers the economy. With the Singdollar spiking after a S$48.4 billion funding package was announced on Thursday, Joey Chew, senior Asia currency strategist at HSBC, has called for aggressive easing to "lean against such untimely expectations" of an SGD recovery .

"SGD appreciation at this juncture may be a burden for the economy that has yet to bottom out," she said. "Some market participants may think that the MAS can preserve its policy ammunition, since fiscal policy is now doing the heavy lifting. However, we think the monetary response ought to be similarly bold."

Mizuho Bank's head of economics and strategy, Vishnu Varathan, called the fiscal boost in the Resilience Budget "a source of enhanced economic confidence that should show up as a positive impact on the currency."

Inbound investment may even have picked up as "risk appetite for SGD assets may be improving" on support for businesses, Ms Chew said.

But weakness in the greenback, rather than gains by the Singdollar, drove the latest USD-SGD movement, which Mr Varathan dubbed "more dependent on the overarching USD trend as it's driven by Fed policies".

Philip Wee, currency strategist at DBS, pointed out that the USD had recently taken a beating from emergency moves, such as two rounds of rate cuts at the US Federal Reserve. "The Fed's currency swap lines with 14 countries, including Singapore, (were) important in addressing the shortages of USD liquidity."

Moving ahead, OCBC Bank currency economist Terence Wu told The Business Times that Monday's policy review will loom over the USD-SGD exchange rate in upcoming trading.

While the MAS move "may be overlooked by the market" if USD softness persists, as Ms Chew noted, Mr Wu still maintained that "we expect USD-SGD to see upside pressure in the medium term" as global growth falters.

Mohamed Faiz Nagutha, BofA Securities' Asean economist, also warned that "there is still room for SGD to weaken, both against the USD and in trade-weighted terms", until the pandemic is curbed.

Still, DBS' Mr Wee, pointed out that the SGD made a similar rally after the MAS eased in 2009 during the global financial crisis, and he did not rule out a bigger SGD rebound in the second half. He has projected it to return to 1.37 against the USD by year-end.

Meanwhile, some punters may be betting on the SGD in the belief that the government will sell foreign exchange assets as it taps its reserves to fund a chunk of its fiscal measures.

But observers dismissed this. Analysts at HSBC and BofA Securities argued that, even if the government does liquidate some assets, the funds would be repatriated gradually and the MAS would manage any impact on the SGD from the conversion.

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