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Singapore dollar surges against US dollar as central bankers keep mum on policy

Sing dollar up nearly 7% so far this year but analysts are divided over its continued strength; Sibor and SOR also up

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The Singapore dollar surged against the greenback as expected on Monday, in line with other currencies, following a meeting of central bankers in Jackson Hole in Wyoming over the weekend.

Singapore

THE Singapore dollar surged against the greenback as expected on Monday, in line with other currencies, following a meeting of central bankers in Jackson Hole in Wyoming over the weekend.

The meeting gave no clue on monetary policy.

As the US dollar sank, the Singapore dollar rallied to S$1.3551 from last Friday's S$1.3594. In the year to date, the Sing dollar has risen almost 7 per cent, and is back to last September's levels.

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Heng Koon How, United Overseas Bank's head of markets strategy, said: "Yes, the USD encountered wholesale widespread selling after Jackson Hole. As a result, USD/SGD fell back below 1.3600 to 1.3550."

He added that the bank's technical indicators suggested that some near-term support can be found at 1.3540/45, followed by 1.3500, and continues to believe that the US dollar will recover later in the year; his forecast for USD/SGD by end of this year remains at 1.40.

"We believe markets are getting complacent on the risks of a Fed rate hike in December, as well as an announcement of a balance-sheet reduction," he said.

The Federal Open Market Committee (FOMC) has said it plans to unwind its US$4.5 trillion balance sheet soon.

Singapore dollar surges

Credit Suisse investment strategist Suresh Tantia also believes the current SGD strength is not sustainable: "We believe investors should not extrapolate the USD weakness witnessed in H1 into H2, as the Fed is likely to announce balance sheet unwinding in the September meeting and raise the policy rate by 25 basis points in the December meeting, which could pressure the SGD."

He expects the SGD to end the year with mild depreciation towards the 1.39 level.

"The current level of 1.3550 offers good opportunity to cover USD shorts," he said.

But OCBC Bank economist Selena Ling thinks otherwise, and is projecting an even stronger Sing dollar by year-end.

"At this juncture, there is still a fair bit of uncertainty revolving around the FOMC's intentions, be it the unwinding of its balance sheet in September this year or its interest rate trajectory going forward. Note the futures market pricing of odds for a third hike by December 2017 is still relatively low, at one-third probability due to the lack of inflation conviction."

Moreover, US President Donald Trump's perceived ability to push through policy reform - whether in healthcare, tax and/or infrastructure stimulus - has largely dissipated, she said.

"The weak USD theme could persist for a bit longer in our view. Our end-2017 USD-SGD forecast is 1.3413, assuming the Monetary Authority of Singapore remains static at the October MPS (monetary policy stance), since both growth and inflation parameters are proceeding as projected."

The MAS said this month that its MPS remains as announced in April.

The local short-term interest rates also rose, which was not exactly expected, as a strong Sing dollar encourages inflows.

The three-month Singapore interbank offered rate (Sibor) on Monday rose to 1.12375 per cent, up 0.00025. The three-month swap offer rate (SOR) on Friday was up a stronger 0.04552 to 1.02255 per cent, back to December levels. The SOR is updated in the evening.

The short-term interest rate gyrations are a function of liquidity and currency expectations, said Ms Ling.

Eugene Leow, DBS Bank interest rates strategist, said: "Higher Sibor and SORs are probably a reflection of tighter SGD liquidity. With SOR having been inordinately low for some time, compared to the Sibor, some catch-up is finally taking place.

"Another way to look at this is that USD/SGD forwards are not necessarily agreeing with the spot market, thereby breaking the link between FX and interest rates."

UOB's Mr Heng said higher Sibor and SOR is mostly due to liquidity management by local firms ahead of the holiday-shortened month end.

"This reinforces our expectation that local rates will gradually inch higher."

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