USD expected to continue rising against Singdollar

Singapore

EVEN as the Singapore dollar is set to continue its "modest and gradual appreciation" against a basket of currencies, analysts expect it to keep weakening against the US dollar in coming months.

On Friday morning, the Monetary Authority of Singapore (MAS) said in its half-yearly policy statement that it would "slightly" steepen the slope of the Singdollar nominal effective exchange rate (S$NEER) policy band.

Noting that MAS called the move a "measured adjustment", analysts largely interpret it as a steepening of the slope by another 50 basis points - following April's similar slight increase - to 1 per cent per annum.

Apart from brief periods of decline, the S$NEER has appreciated in the upper half of the policy band since the April statement, partly reflecting sharper depreciations in some regional currencies against the US dollar, relative to the Singdollar.

Amid the overnight US dollar correction and before MAS's decision, the USD/SGD spot rate had already "pulled back noticeably" from Thursday's intraday high of 1.3830 to about 1.3760, noted UOB economists.

Following Friday's announcement, the Singdollar strengthened slightly against the greenback to S$1.3734 before weakening to around S$1.377 by the afternoon.

Said the UOB analysts: "From a trade-weighted point of view, the MAS decision basically reinforced the relative strength of the SGD in comparison to the Asian currencies."

Given ongoing Fed rate hikes, higher USD yield and further weakness in the Chinese yuan, they see the Singdollar as "likely to continue its gradual weakness against the USD", forecasting a USD/SGD spot rate of 1.39 by the end of this year and 1.41 by mid-2019. DBS FX strategist Philip Wee and rates strategist Eugene Leow similarly maintain their view for the Singdollar to keep weakening against the greenback in the fourth quarter of the year, with the USD/SGD rate eventually rising above 1.40.

Citi analysts see the Singdollar's movement on the policy band as likely to be driven by broad US dollar moves, with a weak greenback driving the Singdollar's outperformance and vice versa. Bucking the trend, Maybank Kim Eng FX strategist Saktiandi Supaat forecasts the Singdollar will strengthen to 1.365 against the US dollar by year-end.

Maybank's estimate is that the Singdollar is currently trading at about +1.3 per cent above the mid-point of the band, with economists Chua Hak Bin and Lee Ju Ye cautioning: "A stronger Singapore dollar relative to many of the neighbouring countries may also hurt tourism and retail spending."