Today’s surprise policy easing from the MAS is likely to reinforce the underperforming trend in the SGD, notes Jonathan Cavenagh, FX Strategist at Westpac, adding that higher levels in USD/SGD are likely to materialise between now and the next policy announcement in April.
Key Quotes
"The MAS surprised the market today by easing policy, which came via a reduction in the pace of SGD NEER appreciation. The central bank released a statement around 8am Singapore time, which was not scheduled, as the next MAS policy meeting was not due until April."
"The fact that the MAS felt compelled to act, inter-meeting, underscores how rapidly the inflation outlook has changed since the last policy meeting in October. Indeed in the first sentence of today's statement the central bank notes that, "Since the last Monetary Policy Statement in October, developments in the global and domestic inflation environment have led to a significant shift in Singapore’s CPI inflation outlook for 2015."
"The sharp decline in oil prices, along with some one-off factors, has weighed heavily on headline inflation. Year-on-year inflation ended last year at -0.2%. Importantly though, core inflation pressures also continue to trend down (1.5%yoy in December) and the MAS also notes that the pass through effect from the tighter labour market to core inflation pressures has also been weaker than expected."
"Such a backdrop, in our view, leaves the door wide open for another policy adjustment at the April policy meeting. The MAS reduced the pace of SGD NEER appreciation with today's surprise announcement but it still maintains a tightening bias with a modest and gradual appreciation of the SGD NEER policy band. Prior to today's announcement we had the annualised pace of SGD NEER appreciation pegged at +2%, we suspect that has now fallen back to 0.5-1.0%. We will be able to firm up this estimate over the coming weeks. The width of the policy band, which we assume to be -/+2% from the mid-point of the band, was left unchanged, as was the point at where the band is centred. Following today’s policy announcement we saw SGD NEER drop to around -2.0% from the mid-point of the band (which coincided with spot USD/SGD trading spiking to 1.3570) but we have now settled back at -1.7%."
"Looking forward, today's move should reinforce a negative SGD bias, particularly against other currencies within EM Asia. The MAS noted today that it stands ready to curb sharp movements in the SGD NEER, hence moves towards the bottom end of the band could see sharp reversals in USD/SGD. Still, we expect SGD NEER to spend the next few months towards the bottom end of the band, as speculation mounts around a shift to a neutral bias at the April policy meeting. In our view this could drive USD/SGD towards 1.3700 by the end of Q1, particularly against an expected positive USD backdrop. SGD underperformance against the likes of INR and IDR is also likely over this period. We will continue to hold our short SGD/INR position."
Key Quotes
"The MAS surprised the market today by easing policy, which came via a reduction in the pace of SGD NEER appreciation. The central bank released a statement around 8am Singapore time, which was not scheduled, as the next MAS policy meeting was not due until April."
"The fact that the MAS felt compelled to act, inter-meeting, underscores how rapidly the inflation outlook has changed since the last policy meeting in October. Indeed in the first sentence of today's statement the central bank notes that, "Since the last Monetary Policy Statement in October, developments in the global and domestic inflation environment have led to a significant shift in Singapore’s CPI inflation outlook for 2015."
"The sharp decline in oil prices, along with some one-off factors, has weighed heavily on headline inflation. Year-on-year inflation ended last year at -0.2%. Importantly though, core inflation pressures also continue to trend down (1.5%yoy in December) and the MAS also notes that the pass through effect from the tighter labour market to core inflation pressures has also been weaker than expected."
"Such a backdrop, in our view, leaves the door wide open for another policy adjustment at the April policy meeting. The MAS reduced the pace of SGD NEER appreciation with today's surprise announcement but it still maintains a tightening bias with a modest and gradual appreciation of the SGD NEER policy band. Prior to today's announcement we had the annualised pace of SGD NEER appreciation pegged at +2%, we suspect that has now fallen back to 0.5-1.0%. We will be able to firm up this estimate over the coming weeks. The width of the policy band, which we assume to be -/+2% from the mid-point of the band, was left unchanged, as was the point at where the band is centred. Following today’s policy announcement we saw SGD NEER drop to around -2.0% from the mid-point of the band (which coincided with spot USD/SGD trading spiking to 1.3570) but we have now settled back at -1.7%."
"Looking forward, today's move should reinforce a negative SGD bias, particularly against other currencies within EM Asia. The MAS noted today that it stands ready to curb sharp movements in the SGD NEER, hence moves towards the bottom end of the band could see sharp reversals in USD/SGD. Still, we expect SGD NEER to spend the next few months towards the bottom end of the band, as speculation mounts around a shift to a neutral bias at the April policy meeting. In our view this could drive USD/SGD towards 1.3700 by the end of Q1, particularly against an expected positive USD backdrop. SGD underperformance against the likes of INR and IDR is also likely over this period. We will continue to hold our short SGD/INR position."
