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MAS October tightening may not be enough for Singdollar to outpace the US dollar

Monex's Jay Zhao-Murray's base case sees USDSGD rising to 1.44, although risks are “tilted” to the downside.

As the Monetary Authority of Singapore (MAS) looks to continue tightening its policy in October amid the inflationary environment, the Singapore dollar is expected to rally against its currency basket, but may still struggle to outpace the strengthening US dollar, says Monex’s Jay Zhao-Murray.

The Singapore dollar has weakened against the US dollar for nearly two years now, with losses accruing to 4.3% year-to-date (ytd). According to the Monex FX market analyst, his base case sees USDSGD rising to 1.44, although risks are “tilted” to the downside.

“Given the Singapore dollar’s stronger performance against its regional peers, the ytd rally in USDSGD isn’t necessarily a concern for the MAS. However, recent dynamics within the Singapore dollar nominal effective exchange rate (S$NEER) basket may be starting to turn,” says Zhao-Murray.

The S$NEER is the trade-weighted currency index comprising a basket of currencies that the MAS uses to evaluate the stance of its monetary policy.

Over the past 24 hours, intervention by the Bank of Japan (BoJ) to lower USDJPY has posed a “new threat” to this year’s upward trend in USDSGD — the Japanese yen holds the fifth-largest weighting in the S$NEER basket. “The fact that BoJ officials are actively buying yen to prevent further depreciation is beginning to place downward pressure on the S$NEER”, he adds.

Nevertheless, Zhao-Murray believes this year’s story is less about the Singapore dollar’s weakness than it is about about US dollar strength — out of 32 currencies in the expanded majors category, the US dollar is ranked 5th in terms of ytd performance, while the Singapore dollar is close behind in 7th place.

Within the APAC region, the Singapore dollar has been the top performer excluding the Hong Kong dollar which is pegged to the US dollar, he notes. As a result, the S$NEER has appreciated 4.8% ytd despite the near 25% weight that the US dollar holds within the basket.

Zhao-Murray explains that the dynamic of a strengthening S$NEER is “by design”, as the MAS judges that long-term currency appreciation is consistent with its historical trend, as well as Singapore’s strong banking and financial system, deep FX reserves, prudent fiscal policy, and wide current account surpluses.

“Over the past year, the pace of S$NEER appreciation has been more rapid than usual to offset imported inflationary pressures,” he adds.

Inflation likely to see MAS continue tightening in October

Zhao-Murray says that the main reason for the Singapore dollar’s strength relative to its APAC peers stems from MAS’s aggressive response to high inflation, which has risen to 7.5% y-o-y as of August.

“Typically, the MAS adjusts policy twice per year, in April and October. In 2022, however, the MAS has tightened policy three times, once in the scheduled April meeting and twice in impromptu inter-meeting announcements,” he says.

Within those meetings, MAS increased the slope of its S$NEER band all three times and re-centred the midpoint of the band higher twice.

“As we approach the MAS’s next meeting, which does not yet have a firm date but is anticipated to occur between October 10th and 14th, there is a reasonable chance that we could see another adjustment,” the analyst shares. This is especially considering that the S$NEER is merely 0.4% below estimates of the top end of the band, with inflation pressures continuing to climb, and MAS’s managing director Ravi Menon recently warning that medium-term inflation will likely be “higher for longer” going forward, the analyst adds.

The pace of inflation has steadily risen, with year-on-year headline consumer price inflation (CPI) either rising or holding flat over the last 11 months. The 7.0% headline inflation in July was up 30% from the month before, driven by food, electricity and gas, while core CPI reached 4.8% y-o-y, which was up from 4.4% in June.

Zhao-Murray points out that both these metrics are running above the MAS’s July forecasts, which were already upgraded to ranges of 5% to 6% for headline and 3% to 4% for core at that time.

​​August’s CPI, which was released on Sept 23, saw core inflation rise further to 5.1% y-o-y in from 4.8% in July and headline inflation coming in at 7.5% y-o-y, up from 7.0% in July. The results were marginally higher than the median economist forecast, which pointed to 7.2% headline and 5.0% core CPI over that period.

Meanwhile, Zhao-Murray notes that the degree of tightening slowed at the most recent MAS meeting. “In April, both the slope and midpoint of the band were adjusted, but back in July, the MAS chose to merely maintain the slope of S$NEER appreciation while re-centring the target,” he says.

He notes as well: “The MAS is unlikely to change the width of the band, as it typically does so only when the degree of economic uncertainty has dramatically changed, and it has not done so in a decade,”.

Zhao-Murray adds that re-centring the band higher would be “hawkish” and have a large near-term impact on inflation. “It would take more time to impact inflation than re-centring alone, which is why both policies are frequently combined when decisive action is needed to lean against inflation,” the analyst explains.

Given current inflation dynamics and the slight distance between the S$NEER and the top end of its range, he believes it is highly likely that the MAS will readjust the centre of the band upward.

“While Singapore’s growth outlook is still positive, with private sector economists expecting 3.6% growth in 2022, it has deteriorated considerably over the course of the third quarter, making the combination of a re-centring and an increase in the slope less likely,” he says.

Still, Zhao-Murray advises that the risk of maximum hawkishness should not be ignored, considering the strength of the latest inflation data and the focus on upside inflation risks in recent commentary from MAS officials.

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