Singapore Dollar to Fall From 29-Year High as Global Recovery Falters

USDSGD has tracked closely with overall risk appetite across financial markets. Indeed, the correlation between spot and the MSCI World Stock index has remained firm since late March on 20-day percent change studies (see Figure 1). This is not surprising. Indeed, the city-state has been able to thrive despite its small size and lack of home-grown resources largely because of its location on major sea lanes. This has produced one of the world’s busiest ports and its top logistics hub as well as allowed Singapore to become a major value-added exporter, ranking 14th in overseas sales and outstripping countries many times its size. Singapore is also the world’s fourth-largest foreign exchange trading center, tying it firmly to trends in global economic growth as well as the ebb and flow of international financial markets.

Figure 1

Source: Bloomberg

A heavy dependence on overseas demand (net exports averaged over 21 percent of GDP in recent years) as well as an acute sensitivity to the global business cycle seems far more like a curse than a blessing given the current economic landscape as most of the engines of the post-2008 recovery begin to falter. European growth is likely to remain lackluster as the region works to trim its sovereign debt burden, Japan remains in deflation, China is willfully pulling on the brakes amid fears of asset bubbles and runaway inflation, and the US has notably lost pace. Indeed, the JP Morgan Global PMI Index and the Baltic Dry Index – both key benchmarks of global economic activity and trade – have started to show signs of topping even as stock markets reverse sharply lower (see Figure 2).

Singapore’s monetary policy is conducted via managing the value of SGD against a trade-weighted basket of currencies. The exchange rate is kept within the boundaries of an undisclosed band, the parameters of which are changed depending on economic circumstances. The Monetary Policy Authority of Singapore (MAS) re-centered the band lower at its semi-annual meeting in April 2009 and has maintained a zero percent appreciation path for it since then “given continuing weakness and uncertainties in global and domestic economic prospects.” The next MAS meeting is scheduled for October, allowing ample time for the current slowdown to develop and be confirmed over several months of economic data. This means monetary policy will (at best) remain at its current accommodative setting, with the risks tilted toward the dovish side of the spectrum should the cooling in global demand prove dramatic in the near term.

Figure 2

Source: Bloomberg

On balance, all signs suggest that the path of least resistance leads toward a weaker Singapore Dollar, opening the door for USDSGD appreciation. Looking at technical positioning, prices are now testing major support above 29-year lows last challenged just before the onset of the global credit crunch and subsequent economic meltdown in mid-2008 (1.3443). The weekly chart shows a clear Bullish Engulfing candlestick pattern, hinting a move higher is ahead. Initial resistance lines up at 1.3673, with a break higher clearing the way for an advance toward the next major hurdle in the 1.4227-1.4363 congestion region.

USDSGD Spot (Weekly Chart) – Created Using CQG, Prepared by Ilya Spivak

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