Singapore surprise spurs dollar gains; Aussie jumps after CPI

[SINGAPORE] The Australian dollar rose against most of its major peers after Singapore's central bank unexpectedly eased monetary policy before a Federal Reserve meeting concludes today.

The Australian dollar rose against all its major counterparts after a report showed the nation's underlying inflation accelerated. Singapore's dollar slid to the lowest since 2010 after the Monetary Authority of Singapore reduced the slope of its currency band. Malaysia's ringgit fell before the country's policy makers announce their decision later today.

"The divergence in monetary policy direction is lending support to the dollar, which is leading other currencies," said Yuji Saito, director of foreign exchange at Credit Agricole SA in Tokyo.

The US dollar rose 0.4 per cent to US$1.1338 per euro at 12:33 pm in Tokyo, after falling 1.3 per cent yesterday, the biggest drop since Oct 15. It reached the highest since September 2003 on Jan 26 at US$1.1098. The yen declined 0.2 per cent to 118.13 per dollar and gained 0.2 per cent to 133.94 per euro.

The Aussie jumped 0.7 per cent to 79.92 US cents. It touched 78.55 cents on Jan 26, the least since July 2009. Singapore's currency was at S$1.3519 per dollar after falling as low as to S$1.3569, heading for the lowest close since August 2010.

The Singapore dollar weakened against all of the 16 major currencies after the MAS, which uses the currency as its main policy tool, said it will reduce the slope of the policy band for the island's dollar in an unscheduled policy statement Wednesday. It also cut the inflation forecast for 2015, predicting prices may fall as much as 0.5 per cent.

"The fact that even the MAS has to ease its hawkish stance signifies the effects of cheaper oil as well as how bad the domestic economy is," Masashi Murata, a currency strategist at Brown Brothers Harriman & Co. in Tokyo, said in phone interview.

The Aussie rose for a third day as the trimmed-mean gauge of Australia's consumer-price index - one of the Reserve Bank's preferred measures - rose 0.7 per cent in the fourth quarter from the previous three-month period, beating the 0.5 per cent median estimate of economists surveyed by Bloomberg News. The RBA targets an inflation rate between 2 and 3 per cent.

Traders saw a 17 per cent chance the central bank will cut rates at this year's first policy meeting on Feb 3, down from 44 per cent odds yesterday, according to overnight interest rate swaps.

"There was talk of a rate cut next week, so the solid CPI numbers have significantly reduced that possibility, supporting the Australian dollar," said Koji Fukaya, chief executive officer and currency strategist at FPG Securities Co in Tokyo. "But it is difficult to expect the Aussie to keep supported especially against the US dollar as the underlying strength of the US dollar remains intact." The Bloomberg Dollar Spot Index, a gauge of the currency's performance against 10 major peers, rose 0.2 per cent. It closed at 1,161.42 in New York on Jan 26, the highest in data back to 2004.

The Fed is forecast to leave interest rates unchanged at the two-day policy meeting that ends today, a Bloomberg survey of economists shows. The chance of a interest-rate increase by the October meeting was 51 per cent, futures data showed. The odds were 72 per cent at the end of last year.

Falling oil prices could prompt the US central bank to also lower its inflation outlook, said Kumiko Ishikawa, analyst at Gaitame.com Research Institute Ltd.

"If there are any comments regarding the risk of further decline in oil prices by the Fed, markets may take it as indicating a delayed timing for a rate increase, pressuring the dollar," she said.

The ringgit depreciated 0.5 per cent to 3.6165 a dollar in Kuala Lumpur, data compiled by Bloomberg show. The currency slid to 3.6277 on Jan 21, the weakest level since April 2009.

"The ringgit is weakening because of the surprise move by the Monetary Authority of Singapore," said Jonathan Cavenagh, a foreign-exchange strategist at Westpac Banking Corp in Singapore. "That's the main driver." Malaysia will keep its benchmark overnight policy rate at 3.25 per cent, according to all 19 economists surveyed by Bloomberg before the 6 pm decision local time.

BLOOMBERG

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