Singapore dollar may become rare global winner as MAS tightens

SINGAPORE – The Singapore dollar has established itself as Asia’s most resilient currency against the US dollar this year, and some strategists are betting on more strength if price pressures force the nation’s central bank to tighten its exchange rate policy again next month.

Goldman Sachs Group, Citigroup and MUFG Bank are among banks that are bullish on the currency, underpinned by an expectation that the Monetary Authority of Singapore (MAS) will extend policy tightening at its October meeting to help rein in core inflation that hit a 14-year high in July.

The predictions come as almost every major currency retreats against the United States dollar, with the Federal Reserve set on an aggressive rate hike cycle. While the MAS’ stance has turned the nation’s currency into a winner against peers in Asia, it is still down more than 4 per cent against the greenback this year.

MUFG Bank puts the likelihood of additional tightening by the MAS next month at 50 per cent, which could translate into a gain of more than 1 per cent for the local currency versus the US dollar over the following months, according to Mr Ng, a currency strategist at MUFG Bank in Singapore.

“Our call of a SGD rebound is premised on most of the Fed’s eventual rate hikes already being priced into markets now,” he said.

MUFG forecasts the Asian currency rising to 1.38 against the US dollar by year end. It closed last week at 1.4070.

Unlike most central banks that use interest rates, the MAS responds to rising core inflation by guiding the local dollar higher against a basket of currencies of its major trading partners. The central bank focuses on the level of the Singapore dollar’s nominal effective exchange rate, referred to as S$Neer, which it allows to move within a policy band.

Still, even if the MAS does extend its policy tightening for a fourth time this year, there is no guarantee that the local currency will rally against the greenback – the Singapore dollar slumped to its lowest in more than two years earlier this month before paring its 2022 decline to 4.1 per cent by the end of last week.

“Despite the MAS tightening, USD/SGD has continued to inch higher amidst a broad USD rally supported by a hawkish Fed, geopolitical tensions and a slowdown in China’s growth,” said Mr Divya Devesh, head of Asean and South-Asia FX research at Standard Chartered Bank in Singapore.

The risk for Singapore dollar bulls is that the MAS decides to keep its policy unchanged next month, which cannot be completely ruled out. The central bank maintained its 2022 inflation projections in August, indicating that the existing policy stance may be sufficient to tame inflation.

The next test comes on Friday with the release of Singapore’s core consumer price index for August, which is to increase 5 per cent from a year earlier. The currency could come under pressure if the data disappoints and expectations for further MAS tightening diminish.

Mr Devesh expects the domestic currency to fall to 1.42 per US dollar in the absence of more tightening.

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