Singapore dollar set to beat peers with MAS poised to tighten

The Singapore dollar has weakened 0.5% against the greenback this year, making it Asia’s fifth best performer. (PHOTO: ROSLAN RAHMAN/AFP via Getty Images) (ROSLAN RAHMAN via Getty Images)

By David Finnerty

(Bloomberg) — The Singapore dollar looks set to move up the regional currency rankings next quarter with rising core inflation expected to spur further policy tightening from the city-state’s central bank in April.

The currency should be better positioned to weather higher U.S. yields than most Asian peers. While other regional central banks remain content with accommodative policy, the Monetary Authority of Singapore appears set to change its exchange-rate band next month to allow for further local dollar appreciation.

The Singapore dollar has weakened 0.5% against the greenback this year, making it Asia’s fifth best performer.

Unlike other central banks that target interest rates, the MAS manages inflation and growth by guiding the export-dependent economy’s currency against those of its major trading partners. It focuses on the level of the Singapore dollar’s nominal effective exchange rate, often referred to as S$NEER, which it allows to move within a policy band.

While monetary tightening typically involves steepening the slope of appreciation within an undisclosed policy band it can also include widening or recentering the band. Barclays Bank Plc strategists think next month’s decision may involve all three. This could lead to noticeable Singapore dollar appreciation against the country’s main trading partners, many of which are Asian.

“We expect the S$NEER to gain ~3.0% from current levels into year-end,” a team including Brian Tan, senior regional ASEAN economist, wrote in a client note dated March 15.

They predict S$NEER strength to be front-loaded, and for it to climb 30 to 40 basis points to near the top of the band in the run-up to the April policy review. They also believe “the S$NEER is likely to track the expected re-centering move in April and gain another 150 basis points” if the MAS decision is as they forecast.

The reason why further MAS action is expected, even after “slightly” tightening policy in January, is because core inflation is still accelerating. It rose to 2.4% on a yearly basis in January, the highest since 2012. Data on March 23 is expected to show it was 2.5% in February.

Further MAS policy tightening bodes well for the Singapore dollar, not only against regional currencies, but also versus the greenback. Jeff Ng, FX strategist at MUFG Bank Ltd. in Singapore, sees the local currency rising to 1.33 against the dollar by year end. It traded around 1.357 on Friday.

Here are the key Asian economic data due this week:

• Monday, March 21: China 1- and 5-year loan prime rate, New Zealand trade balance and credit card spending, South Korea 20-day exports/imports, Taiwan export orders, Thailand customs trade balance

• Tuesday, March 22: RBA’s Lowe on panel, New Zealand 1Q consumer confidence

• Wednesday, March 23: Singapore CPI, Taiwan industrial production

• Thursday, March 24: BSP policy decision,

• Friday, March 25: Singapore industrial production, Malaysia CPI

—With assistance from Melissa Cheok.

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